Assuming that both parties can agree, the ratification process will not be easy and there will be disruptions after January 1st. Nevertheless, a lasting appreciation of the UK equities remains possible next year.

Given the years of Sturm und Drang*, the Brexit process qualifies as a 'saga'. On the 31st December 2020, the UK will end the transition period that began on the 1st February 2020, the day after the UK officially left the EU. The Withdrawal Agreement and transition period continued the status quo of membership (including trading relationships and payments into the EU budget) for the entirety of 2020. While many deadlines have come and gone since the referendum vote on June 23rd 2016, the end of 2020 provides one of the few immutable deadlines, as both sides have vowed not to extend the transition.

In trading negotiations, the challenges stem from the extent and method of converging differing economic and regulatory systems. This is the first time in history that a new trading arrangement is being created with divergence as its goal, given the UK’s integration into the EU’s structures since 1973. What should have been a straightforward process has, as so often throughout European history, been complicated by politics. The EU has been driven by what it views as an existential threat to its raison d’etre (that membership confers benefits that justify the price tag to net contributors) and has made extensive demands on the UK post its exit. The UK has had to justify the disruption stemming from the referendum result by showing that its new status will result in increased sovereignty and national benefits.

Three major area of disagreements

Given the integrated nature of the UK within the EU, it is positive that there are 'only' three major areas of disagreement. Of greater immediate concern, it is discouraging that these have been the outstanding issues since the spring and limited 'official' progress has been made to resolve them. The EU’s success in securing its key ambitions in the withdrawal negotiations (financial settlement, rights of EU citizens in the UK and the Irish border) provided an inflated sense of the power dynamics in the negotiations. During the current phase of negotiations, the UK has strong bargaining chips (fishing, a notable goods trade deficit and more attractive terms of trade in terms of tariffs applied in a WTO scenario) and the EU has been reluctant to make compromises to its demands of UK regulatory alignment to EU policy.

The three contentious issues remain fishing, state aid policy and the enforcement mechanisms to ensure that both sides comply with an eventual agreement. Trust has not been helped by the UK’s proposed Internal Market Bill, which is still working its way through the UK Parliament. However, despite the public differences, 'landing zones' have been identified and practical compromises are certainly in sight. The reality is that in the past four years, the UK has moved away from the soft Brexit that Prime Minister May and the EU had originally hoped for. As a result, despite some potential short-term disruption, the agreement hoping to be passed by year end does not differ markedly from WTO trading terms. As the EU’s chief negotiator has noted, 'there will be disruption regardless' as of 1st January 2021. While Prime Minister Johnson may prefer a deal and see a small political gain from signing a deal, the pressure is nowhere near as intense as it was in the first two years to avoid a no-deal outcome.

Where there is a will, there is a way

Assuming both sides can agree to come to a deal, the ratification process is not straightforward and will need to be expedited. The UK Parliament needs to approve the treaty, but PM Johnson’s strong majority should allow it to be approved quickly (given the opposition is more pro-EU than the Conservative party and will vote in favour). On the EU side, the EU Parliament will need to work quickly to give its approval, without raising objections. Normally, trade treaties need to be ratified by national parliaments (and certain regional parliaments, as was the case for the CETA deal), which adds to the time required. 'Where there is a will, there is a way' and the EU will dust down its ability to fudge the passage of the treaty on time (as seen so many times during the eurozone crisis). Apart from the resurgence of the virus across the continent, the EU is also grappling with the passage of its new MFF budget, as well as the Next Generation EU plan to help stimulate economies post Covid. The next European Council takes place on 10-11 December, which is likely to be the final date to pass a deal, given the desire to move on from Brexit.

Assuming a deal is reached and passed by year end, or shortly after, this will be viewed positively for European equities, primarily UK public equities. After four years of underperformance, the FTSE All-Share trades at the same relative low to the S&P500 as that reached in 1974. A growing list of investment banks and investors see significant upside in UK equities. With the (partial) resolution of Brexit, as well as positive news on Covid’s defeat, a sustained re-rating of UK equites is certainly possible in 2021.

* Sturm und Drang (storm and passion) is a German artistic current. The expression has been commonly used in connection with Brexit since 2016.