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David Riley, Chief Investment Strategist, BlueBay Asset Management, joins Dave for an update on the latest Brexit developments – including a look at how the move faces new implications under international law. David also shares an outlook on the U.K. economy, as it braces for a potential second wave. [9 minutes, 51 second] (Recorded September 18, 2020)


Hello and welcome to The Download. I’m your host, Dave Richardson, and I’m joined today by David Riley from BlueBay Asset Management. He is Chief Investment Officer there. And for many Canadians, obviously, our ties to the U.K. are well established and historic. And many of us watch with interest what’s going on around the Brexit negotiations. What’s evolving with Brexit, what’s been happening there. But of course, with COVID-19 and the U.S. election, it’s been sort of lost in a lot of other headlines. So I thought I’d ask David --who tracks this extremely closely over in London -- about what’s happening with Brexit. And I guess the big news, David, more recently is that the U.K., as they’re pushing things along, may be breaking international law? Can you explain how that could work out?

Good to speak to you, Dave. Yes, it was a pretty jaw-dropping moment when we had a British minister stand up in the House of Commons, and confirm the legislation that’s being proposed by the current government would, in fact, break international law. Now, you know, us Brits have a kind of self-image of a law-abiding nation. Word is abound, and it sparked a huge amount of controversy, with former prime ministers lining up to condemn it. We’ve had fury from the European Union, because essentially the U.K. government is proposing new legislation, which is an internal market bill, in preparation for when the UK leaves the European Single Market and Customs Union at the end of this year, as you know. So we left the EU legally, but haven’t left the economic structures. And that legislation basically overrules the Northern Ireland protocol. Which is part of the withdrawal agreement, and which is an international treaty. It would therefore break international law. So it’s certainly been a big deal within the U.K. and made the relationship and the negotiations between the E.U. and the U.K.-- which weren’t going particularly well in any case -- very, very acrimonious.

So David, where does this end up? Are we ultimately heading for some kind of Canadian-style trade deal with Europe, or does it just completely unravel? Where do you think we’re headed here?

Here’s the way it is: this legislation and the way it breaks the withdrawal agreement. Your listeners may remember the whole issue around Ireland, a hard border on the island of Ireland, and the Good Friday peace agreement back from the 1990’s. A key part of that is to have an open border between the north and the south. If there’s no trade deal between the U.K. and the E.U., if there’s no tariff-free quota, free trade deal — along the lines of the deal that Canada has with the European Union — it basically keeps that border on Ireland open by shifting it between Northern Ireland and mainland U.K. In other words, Great Britain. So it kind of creates a customs border down the Irish Sea. And this legislation basically says no, no, no — if we don’t get a deal with the EU, we’re going to ignore that. Which is why Nancy Pelosi had a welcome part on the Brexit side when she said if you breach what we consider to be the Good Friday Agreement, you can kiss goodbye to any idea of the U.K./U.S. trade deal. And I think Joe Biden has said something similar. So, you know, why is this happening? What does it mean — to your point, Dave — about the chances of U.K. securing a trade deal? There are lots of interpretations going around. But my interpretation is that the British Prime Minister, Boris Johnson, is up in the stakes. He’s demonstrating his willingness to contemplate a no deal in order to secure a more fair welcome from the negotiations. It’s basically a Trump strategy. You create a crisis, you create noise and fury, and then you compromise to resolve it. And, of course, in the process, you claim a big win. So I still think on balance, it’s more likely than not that the U.K. and the E.U., who are still negotiating, will secure, as I say, a “Canada-style” trade deal. If they do, then this breach of the treaty and international law basically gets resolved, and goes away. So in one respect, it’s big news. But in other respects, it actually doesn’t change anything fundamentally. It still really does depend on getting a trade deal between the E.U. and U.K., and time is running out for that. That needs to basically be done over the next several weeks, by the end of October.

Mixed in that response, by the way, is one of the most concise and effective description of the current president’s negotiating style and approach to negotiations. So go back and listen to that, because I thought it was brilliant. But, David, let’s just finish off with what’s going on with Brexit, and then the U.K. obviously being one of the harder hit nations around the world with respect to COVID-19. We were discussing before, and it seems like a second wave is coming on that has left the U.K. economy really struggling relative to other developed countries. In terms of the impact it’s going to have on GDP this year. Could you talk about the state of the U.K. economy right now relative to Canada, the U.S., and some of the other large economies around the world?

Yes, well, in one word I could describe the British economy as bad. In two words: very bad. So the U.K. economy is going to contract by at least 10% this year. Compare that with Canada -- I think it’s forecasting around a 5 or 6% contraction in Canadian GDP. Which is still a pretty bad recession for you guys, but it’s half the size of what’s happening in the U.K. I think that’s in part because the U.K. economy wasn’t in a particularly strong position coming into this crisis. And then, the U.K. was particularly badly hit by the pandemic. We came out of lockdown somewhat later, you’re absolutely right Dave. There’s about 10 million people within the U.K. right now who are being subject to additional new restrictions in terms of social gatherings. For example, in North-East of England, Newcastle — if some of your listeners are familiar with it — it’s been a party place and they’ve now imposed a curfew at 10 o’clock in the evening. Which is not going down particularly well, particularly with younger people. And then you put Brexit on top. Now, if we don’t get a deal between the European Union and the U.K. — you know, almost 50% of U.K. exports go to the E.U. That would be subject to tariffs, including on things like autos, food as well. And I dare say that would have a pretty meaningful impact on the U.K. economy. I think that’s going to show up in terms of the Bank of England. Dare I say, if we don’t get a deal, I think the Bank of England will respond with negative interest rates. So we might join the negative interest rate club as well. The Sterling would come off by 10% as well in that scenario. It’s also going to be a hit for the European Union. But I think the European Union is collectively less exposed to the U.K., although it’s clearly going to be bad news for Ireland as well. So the stakes are pretty high for all sides. Which is why I still think we’ll just about get over the line. But I’d say right now, the market is probably pricing a 60% chance — if you look at Sterling — of a deal being done. And I say that’s probably about fair. So, you know, it’s going to go down to the wire.

Wow. Well, again, it’s unfortunate that, particularly in North America, Brexit has somewhat been pushed to the back pages of the newspaper. But that’s a fantastic update and obviously something that investors all around the world should be monitoring closely. And let’s keep our fingers crossed that things play out with the best result. David, thank you as always. And hopefully we can connect again over the next couple of months, and get an update on how things are progressing.

Thanks very much, Dave.

Thanks, David. Bye.


Recorded September 18, 2020

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