Investors have largely traded around two geopolitical themes in 2020, the US election and Covid-19. While both have moved markets, the chaotic talks between the UK and EU have barely featured in conversations GlobalCapital has had with equity market participants.
This cannot be because the talks are unimportant. Despite the sabre rattling both sides need a deal to cement what is going to be both parties' most important trading relationship.
For British corporates, the most important group of issuers in terms of Europe’s equity capital markets volume, a trade deal is vital. In October the Confederation of British Industry combined with over 70 industry associations in calling on both the UK and EU to strike an "ambitious" trade deal.
However, after months of bad-tempered Brexit talks, even a flimsy deal looks hard to achieve let alone an ambitious one.
There is also still a good chance of no deal at all by the end of the year, meaning that over 40 years of trading cooperation between the UK and the EU will end overnight on December 31, and the harshest of trade barriers imposed the next day.
Even if there were a threadbare deal, without a long grace period of implementation most businesses will be nowhere near being ready for the scale of the change which is set to happen overnight on New Year's Eve.
It is ludicrous to think that a no-deal Brexit, or a bad deal, could not affect equity, and equity capital, markets.
Great Britain may be an island but few UK corporates operate in that way. Many depend on seamless just-in-time supply chains from Europe and others make some, or most, of their profits by selling goods or providing services to the continent and Ireland.
Any banker who undertook an equity capital raise in March or April will remember how difficult it was to do deals if companies could not give assurances about their earnings because of Covid-19.
A similar situation may arise next year if companies cannot determine how badly they will be affected by a sustained period of no trading cooperation between the UK and EU.
In the secondary markets, UK equities, which are starting to recover some of their lustre on hopes of a Covid-19 vaccine coming early next year, could easily be hammered again if trade talks completely break down and companies' revenues come under pressure.
The UK and EU are engaging in further talks this week and although there are hopes of some sort of deal soon, there is little sign from either side that this is close.
The lack of concern in the markets cannot be disinterest but is likely a belief that a deal is too important not to happen. As one banker put it on Tuesday, “no one believes either side would be so stupid to sign off on a no-deal Brexit in the middle of a pandemic.”
But, to paraphrase a famous City adage, politicians cans be irrational for a lot longer than investors can stay solvent. However unlikely, equity markets should still prepare for the worst.