What is the Brexit dividend?

This article is part of
What you need to know about the Budget 2018

The much-awaited last Budget before Brexit barely had any mention of the UK’s looming departure from the EU. 

"The fact that the OBR increased its near-term growth forecasts but left its longer term projections subdued is telling, in our view."

While Mr Park believes that an agreement between the EU and UK will generate some form of “dividend”, he warns: “Irrespective of today’s announcements, political risk looks set to continue to dominate UK economic and investor sentiment until clarity on Brexit is provided.”

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Greater volatility? 

Mr Park also outlines the risk to UK asset prices if the Brexit negotiations are prolonged.

“The closer we get to the secession date without a deal, the more volatility we expect to see," he explains. 

"While UK assets will likely experience a relief rally if a deal is struck, depending on the detail, political uncertainty should remain elevated for an extended period and this is likely to weigh on domestic economic growth, and potentially UK assets, in the coming years.”

But David Zahn, head of European fixed income at Franklin Templeton, says Mr Hammond’s measures, coupled with the lower than expected budget deficit, will largely be supportive for gilts. 

Mr Zahn says: “The outcome of the Budget was as expected with the largest spending increase going to the NHS, as had already been flagged by the Prime Minister. However, even with the increase in spending and the bringing forward of tax cuts, the UK budget finances look in good shape, with the budget deficit continuing to decline in absolute terms."

According to Mr Zahn, this means the amount of Gilts required to be issued will also decline for 2018 to 2019 to £97.5bn down from £111.5bn in the previous year. 

But he warns that the prevailing uncertainty from Brexit will also bring volatility to the Gilt market. 

“Over the past decade, investors have had the luxury of continued strong performance in gilts, but in light of today’s announcement and increasing global uncertainty, investors will need to be careful about how they manage the associated risks, as a failure to engage with every portion of their portfolios in these volatile times could have a significant impact,” Mr Zahn adds.