What does the end of the Brexit transition period mean for the markets moving forwards

After years of Brexit uncertainty, the end of the transition period has finally arrived and the outlook for the UK is starting to improve, both for stocks and the pound. A post Brexit trade deal being struck with the EU and a solid rebound in the UK economy expected this year means that some sort of mini relief rally could be on the cards, although near term covid concerns can't be ignored.

Rebounding GDP Post Brexit for the UK

The UK economy was one of the hardest hit developed economies by COVID in Q2, which came at a time when the UK was already experiencing high levels of uncertainty over its future amid Brexit and post-Brexit trade talks with the EU.

The UK economy contracted by an unprecedented -19.8% in Q2, significantly worse than its European peers. Looking ahead, the Bank of England expects GDP to rebound 7.5% in 2021, which is more optimistic than the Office of Budget Responsibility which forecasts a 5.5% rebound; meanwhile the IMF expects 6.3% growth:

Limited gains for the British Pound (£)

The pound has seen a solid runup over the past few months, not just against the US Dollar which slipped to a 2 ½ year low towards the end of 2020, but also, albeit to a lesser degree, against the Euro. The rally in the Pound came amid increased expectations that a Brexit trade deal would be agreed.

A Brexit trade deal and the end of the transition period draws a line under years of Brexit uncertainty, making the UK more attractive to investors. However this is by no means the end of the story. The pound could struggle to gain much ground from its current levels around 1.35. Even with a deal in place, the UK still faces greater costs of doing business with the EU, the country’s largest trading partner, with no-tariff barriers potentially as high as 14% according to the Treasury.

So, whilst a small move higher could be on the cards, the upside could well be limited. Most investment banks project GBP/USD to trade in the 1.25-1.35 range by the middle of 2021:

GBP USD Currency Forecasts – British Pound £ Versus the US Dollar $

Source: Global Reach

However, should a more upbeat economic path be followed there is a good chance that the pound could spur higher.

Learn more about trading forex.

FTSE Recovery in 2021

The FTSE has consistently underperformed every year since the 2016 referendum and the index has been underweight among managers’ consensus across the same period. Just as the market was starting to come to terms with Brexit, COVID struck the UK with its worst recession in 300 years.

However, with a Brexit trade deal agreed and the possible global COVID recovery in sight, investment banks are turning increasingly positive on the UK market. Morgan Stanley has identified the UK stock market as one of its key investment calls for 2021, along with Citi and Goldman Sachs to name a few. UBS even went so far as to say that the FTSE is their preferred market for 2021 with a target price of 6800 by June.

The end of the transition period and the skinny trade deal has at least removed some uncertainty surrounding the UK. This is expected to clear the way for more investment into the UK, potentially boosting the index in the coming months.

Pandemic Rebound

It is impossible to talk about the FTSE’s recent past and future performance without mentioning the global pandemic. With regard to COVID, the UK economy was more severely hit than some other countries, which was reflected on a steeper decline and a slower pickup for domestic stocks. The relative lack of technology stocks on the FTSE has meant that it missed out on the pandemic tech stock rally. However, it is better positioned to take advantage of the rotation into value stocks that goes hand in hand with the COVID vaccine recovery rally.

A possible global recovery in 2021 is expected to benefit industrial companies and sectors such as banking, house builders and energy which reflect the health of the economy.

Learn more about the Covid-19 vaccine & market implications.

British Pound (GBP), FTSE 100 Correlation

The only real problem that lies ahead for the FTSE could be the pound. With more than 70% of the FTSE’s revenues coming from overseas, the FTSE is a natural hedge against a decline in the Pound. However, its prospects could be hurt by a strengthening pound which hits the bottom line of many firms. In the 3 months immediately following the Brexit vote, the pound dropped 12% versus the US Dollar and the FTSE gained 10%:

FTSE Recovery in 2021

This correlation has since broken down and the pound and the FTSE are enjoying the longest period of positive correlation since 2014. This means that should the trend continue, a stronger pound may not hold back the FTSE in 2021.

Learn more about trading the indices

For further insight into what 2021 could have in store for the markets take a look at other titles in the series:

Will US Chinese relations continue to deteriorate in 2021?

Economic, geopolitical and social implications of a Biden presidency

The big 5 tech stocks now represent 25% of S&P's value, what could disrupt these behemoths?

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.