Brexit takes flight

Why you need to see Brexit in three stages: direction, negotiation and acclimatization.

UK Prime Minister Theresa May has now triggered Article 50. This starts the process by which the UK leaves the EU and it may well be the beginning of a complex journey.

Investors will need to make a range of decisions over the next two years against a background of continuing uncertainty. We believe it will be useful to consider the Brexit process as having three phases:

Direction – the first six months
The likely direction that the UK will take to Brexit will become clearer in this first phase. Markets will struggle to assess the implications. GBP could fall further if it continues to be out of line with US/UK interest rate differentials.


Negotiation – 6-24 months
Potentially complex negotiations will take place, with financial markets starting to anticipate the reality after Brexit. Macro and market indicators could go out of sync with each other and periods of volatility look certain. Growth and the government’s fiscal position could come under pressure. The FTSE 100 could fare well in the medium term due to its ex-UK focus (see below). But it cannot defy gravity forever. Longer-term, multiple factors could push gilt yields higher.

Acclimatization – 24+ months
Following the agreement of the Brexit terms, this removal of uncertainty could lead to a short-term boost to the markets. But the longer-term impact on trade and the size of the economy may soon overshadow this. UK competitiveness and its ability to adapt will be in the spotlight.

Finally – Brexit will not be the only game in town. UK assets may be equally affected by economic and political developments in the US and Europe.

Christian Nolting
Global Chief Investment Officer
Deutsche Bank Wealth Management