FTSE’s Brexit Blues Likely To Last Into Next Year By Investing.com

© Reuters.

By Geoffrey Smith

Investing.com – Two factors are expected to underpin UK stocks next year. The first is the post-pandemic economic recovery, to which commodity-heavy and midcap companies, with their group of domestic market-focused service companies, are heavily exposed in different ways. The second is the return of international portfolio managers to equal weights for UK stocks after years of underweighting due to a lack of clarity on Brexit.

The first track remains intact, despite the likelihood of a few hiccups along the way. Friday’s announcement from GlaxoSmithKline (NYSE 🙂 and Sanofi (NASDAQ 🙂 that their vaccine had not been shown to be effective in stage 2 trials is an example of that. The pair now say they will redesign the drug and try again, but do not expect it to be available before the fourth quarter of 2021. GSK shares were unmoved by the news, however, especially as the race to achieve vaccines on the market have already been lost. GSK was up 0.7% mid-morning in the UK, helped by the weakness of the British pound and the comforting knowledge that it doesn’t matter which vaccines return the world to normal if it means all other GSK drugs they can return to their current state. pandemic sales levels when intensive care rooms are cleared again.

But the second issue seems to be in greater danger. The never-ending nightmare of Brexit looks like it may still extend into the new year, albeit in mutated form. European Commission President Ursula von der Leyen told reporters after a meeting with EU leaders that “There is no deal” as of January 1, when the current post-Brexit transition agreement expires, it is more likely a deal of any kind. That EU leaders spent the whole night haggling (with some success) over their budget and the € 750 billion Recovery Fund, and only 10 minutes (according to various news reports) talking about Brexit, he strongly suggests force that no one sees an agreement. on the table that is worth discussing.

The possibility of a deal has been thwarted by the EU by inserting, at the last minute, additional requirements that would force the UK to follow any future tightening of regulatory standards in the EU if it wanted to maintain full access to the single market. This is not a demand that lawmakers from Prime Minister Boris Johnson’s Conservative Party will gladly accept.

UK officials complain that the lawsuits are unfair, but that’s meaningless. The negotiations are about what you think you can get away with, not what is fair or unfair. The addition of new lawsuits at the last minute comes just three days after the UK relented by withdrawing offensive parts of its new internal markets bill to placate the EU. That makes it very clear where the balance of power is in the negotiations.

All of this suggests that the EU is calculating that the impact of No Deal in January will be harsher in the UK than in the EU. The UK will have to impose tariffs on EU imports (equivalent to around 13% of UK GDP) under World Trade Organization rules, with direct impacts on the cost of living. Given that UK imports constitute only 4% of EU GDP, the EU’s calculation appears to be well founded. However, it does assume that the EU is willing to compensate Ireland for the particularly heavy impact it will suffer from trade disruption, especially as many of Ireland’s exports are perishable and must avoid delays at the border.

Assuming the new year begins with disorder and recriminations, the most likely way forward is for the chaos to only slowly and gradually mend itself. That’s not a scenario in which international portfolio managers are likely to go back to UK equities, as good as the post-pandemic rally sounds.

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