What to expect as Brexit talks heat up

As Brexit talks start up, immigration will be a tricky issue. That’s because, leading up to a British exit, EU-Britain negotiations will focus on whether the free movement of goods, capital, services and people between Britain and the EU will be maintained.

On Sunday, U.K. Prime Minister Theresa May said in a speech that her government plans to start the process of leaving the European Union by the end of March 2017. And in reports since then, negotiators such as EU lawmaker Guy Verhofstadt have emphasized that balance must be found between Britain’s demands and the health of the EU.

So far, Britain would like to limit immigration of EU citizens but keep access to Europe’s tariff-less common market. However, the EU has long insisted Britain cannot be part of the common market if it blocks EU workers.

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Since the Sunday announcement, the pound has dropped to a 31-year low, as trading as investors fret over the British government’s suggestion it will focus most on controlling immigration.

In reaction, global investors have been selling the currency: the pound fell on Monday after the comments by May and Hammond—dropping 1.1% to $1.2835. It then fell another 0.5% on Tuesday to $1.2760, its lowest point since 1985.

Kathleen Brooks, research director at Forex.com, told The Associated Press that foreign exchange traders are “spooked by May’s apparent sanguine attitude to leaving the [EU’s] single market,” and by her preference to “focus on immigration and U.K. sovereignty.”

A recent KPMG study highlights the same issue: it finds company CEOs in Britain are considering moving some business away from the U.K. amid concerns about the country’s future outside the European Union. In fact, three fourths of the 100 executives questioned would consider moving their headquarters or some operations outside Britain in order to keep a link to the EU’s common, tariff-less market.

Treasury chief Philip Hammond’s comments to the BBC this week suggest markets also fear turbulence in the coming years. He told the news outlet that Britain will face at least a couple of years of uncertainty as Britain goes through the process of leaving the 28-nation trading bloc.

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“We must go into this negotiating period with a realistic expectation of the turbulence that there could be during the negotiations,” Hammond told the BBC. “People will be speculating _ one day it’s going very well; one day it’s not going so well. We have to expect a period when confidence will go up and down […] until we get to a final agreement.”

To help the economy through future turmoil, the British government has agreed to ease off its budget austerity drive. Hammond told the BBC he would abandon the goal of the previous government to put the country’s books into surplus by the end of the decade. He also hinted at tax cuts to stimulate economic activity.

Where should investors look?

Nigel Green, founder and CEO of deVere Group in London, U.K., says investors are increasingly likely to dump U.K. assets between now and the start of the Brexit negotiations, in a research note.

“Until the talks start, there will be no clear answers to the important questions about the U.K.’s future relationship with the EU or the rest of the world, and this is going to create ongoing uncertainty,” he adds. “This suggests a higher risk for investorss.”

But, Green notes, “One asset class that is likely to remain largely unaffected is U.K. property. This remains highly in demand by U.K. and overseas investors due to the ongoing fundamental strengths of British residential property investments, and because of the fall in the value of the pound.”

Still, “investors are now more likely to increase their exposure to other international markets. [They] will be rebalancing away from the U.K. in favour of global stocks, bonds and, perhaps, property too.”

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