Ahead of Article 50 being triggered on Wednesday, Guy Foster outlines the sort of market movements he expects to see and some potential changes that could result to currency markets and funds
The market has accepted and, to some extent, priced in the triggering of Article 50 on 29 March 2017. More likely, sterling will be impacted by the unfolding drama of the negotiations, which itself drives the performance of a number of equity sectors.
While investors have been conditioned to expect the worst outcome - namely, a full break from the European Union, possibly without membership of the single market - it could be worth holding back a little on negative speculation.
The UK government and its European trading partners are bound initially to strike an uncompromising tone but this is not necessarily reflective of the end position either side expects to reach.
The degree of negativity surrounding the UK pound has been excessive. Better economic performance - or a more constructive resolution of the negotiations - would enable it to recover. This would be good for UK equities relative to their overseas peers, for retailers and for real estate.
It would enable smaller businesses, which tend to be domestically focused, to outperform larger companies who have benefitted from the fall in the pound inflating their overseas sales.
Misconception on negotiations
So what should investors be aware of? There is a misconception that, compared to the UK, the Europeans do not have as much to lose from failing Brexit negotiations. This approach focuses on the winners and losers - so ignoring the reality that, in a trade, both parties are beneficiaries.
There is a reasonable chance that both parties would see this is the case, and work towards a deal. Taking a protectionist or indeed, arrogant, approach would harm the potential for a mutually beneficial relationship to be formed.
Despite this, if the worst were to happen, the situation could be dire for the UK. The UK spends more than it earns in international terms, and must attract foreign capital every year to maintain the current level of economic activity. Failure to offer investment opportunities would mean a further decline in the pound, and a decrease in both output and private spending.
Investors need not be too alarmed though. Developed economies such as the UK are unlikely to suffer from a rapid collapse in confidence - the UK is underpinned by robust institutions that give investors' confidence. It might look set to be a rough ride at times, but investors do not need to jump ship.
Guy Foster is head of research at Brewin Dolphin
Joining London team
Previously at Old Mutual Wealth
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