Setting the schedule
In an unusual move for a party leader, Theresa May addressed the Conservative Party conference on the first day and set out the agenda for so-called Brexit. The Prime Minister plans to activate Article 50 (the legal notification to leave the European Union (EU)) by the end of March 2017. The UK will subsequently have to leave the EU within two years. Whilst this removes the ambiguity of if and when the UK will leave, uncertainty will now be entirely focused on the future relationship between the UK and its neighbours. Early indications are that trade arrangements may be sacrificed in favour of restricting immigration.
The Prime Minister’s speech was quickly followed by some indications about policy from the new Chancellor, Philip Hammond. He set out his intention to move away from the objective of balancing the books by the end of the decade; a policy that George Osborne had made a key part of his Chancellorship. Investment in housing and infrastructure looks set to be the beneficiary as the purse strings are loosened. Mr Hammond also laid out his expectations for potential turmoil due to the uncertainty that will precede Brexit. Political commentary in the UK and on the continent are likely to become significant drivers of the exchange rate and investment markets in the UK over the next two years as negotiations are carried out.
With the effects of uncertainty likely to be mostly felt in the exchange rate, movements in the value of sterling should be an important factor for the direction of UK assets. Larger companies with greater overseas earnings may outperform as the value of revenues gained abroad rises once converted back into pounds. A weaker currency should also result in higher inflation, boosting the value of inflation-linked gilts relative to their conventional peers. Finally, any overseas asset will benefit in the sterling terms from a weaker currency.