What “No Deal” Means for Finance

A few years ago “Deal or No Deal” was just a cheerful family gameshow.  Now it’s a pressing question with all kinds of implications for just about every area of life in the UK.  Here is what “no deal” could mean for finance.

Bond yields

The UK is in debt, according to the recent spring statement, debt is trending downwards (and is forecast to continue to do so) but it is still in debt.  When dealing with debt at a personal level, it’s standard practice to analyse how a person got into debt in the first place and this is also a reasonable question to ask of government, however, it doesn’t typically make a difference to the fact that the debt needs to be paid off and ideally needs to be paid off as affordably as possible, which basically means paying as little interest as possible.  As with most forms of debt, including government bonds, the interest paid, or yield, is in large part a reflection of the creditor’s perceived risk.  Not to put too fine a point on the matter, it’s a vote of confidence, or otherwise, in the debtor.  If Brexit means that creditors lose confidence in the UK government’s ability to finance its debts, then the government will need to offer higher interest rates to tempt them to part with their cash and, one way or another, this additional cost will be passed on to the public, be it through higher taxes or a reduction in services (or a combination of both).

Asset prices

In a way, it may be a bit unfair to single out Brexit here.  It would probably be much fairer to say that asset prices tend to reflect the state of the economy as a whole and hence will presumably be influenced by Brexit.  There are, however, two key points to note here.  The first is that the state of the economy is just one of the factors which can influence asset prices and the second is that the state of the economy can impact different assets in very different ways and, what’s more, some of those ways can seem very counter-intuitive.  For example, retailers offering budget clothing may see their share prices dive as customers on lower incomes only buy what they really need whereas retailers of more premium clothing may even benefit as customers on higher incomes continue to spend as usual and customers on lower incomes save up to buy fewer, better-quality pieces which they know will last longer than the “fast-fashion” items from the budget stores.  Likewise “safe” assets such as property and land may actually increase in value as people trust in the long-term demand for such assets.

The value of the currency Ever since the referendum, the value of the pound has provided a fairly reliable indication of how the financial markets are feeling about Brexit.  Right after the result of the referendum was announced, sterling absolutely plummeted and whenever there has been positive news on the issue of Brexit, it has boosted the currency.  While it is well understood that all changes, including currency fluctuations, benefit some and disadvantage others, what may be less well appreciated is the impact currency fluctuations could have on the property market and hence on the public as a whole.  In simple terms, if Sterling falls, then Sterling-denominated assets will become more affordable to international investors.  If  this results in UK residential property