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Chart 55: OBR / BofAML UK GDP forecasts Chart 56: UK Public sector net debt is expected Chart 57: The weaker econ outlook has helped materially lower in 2017 to return to 1960s levels decouple GBP and gilts since late Sept’ 16 . 120 { mums OBR real gdp Syoy growth forecast UK Public sector net 25 40y gilt yield 6 mums BAML real gdp %yoy growth forecast debt as % GDP... 4 55 === OBR UK real gdp %yoy growth March vs Nov 2016 forecasts. 100 2 —— GBP/USD (RHS) - 15 2.1 80 4 2.0 15 A5 60 14 4 4 40 Ris) 1.3 0.5 20 1.25 0 0 1.2 gE CER RE Se aa ecu fbeeae se SBRSESSSSSSSSSSSSS & 8 3 BS 28 Source: BofA Merrill Lynch Global Research, Office of Budgetary Source: Office of Budgetary Responsibility Source: Bloomberg Responsibility Certainty that Brexit negotiations will start, but uncertainty on the details Against this debt and growth backdrop, investors are likely to want clarity and visibility on policymaking in order to continue funding the Uk’s deficit in our view. We think they could be disappointed. Firstly, the Government has committed to triggering Article 50 by the end of March 2017. We think this is likely irrespective of the outcome of the Judicial Review on where the legislative power lies for making that decision. Second, the Government’s formal position is not to announce its negotiating strategy in public. A lack of insight into the Uk’s future trading relationship with its biggest export market for goods and services is a difficult backdrop upon which to continue investing in the UK, even if a few companies have taken that decision already. Third, we think there will have to be a resolution to the trade-off between the Government’s desire to control immigration and reach a beneficial economic settlement. The problem, as is often repeated by EU leaders, is that curbing migration puts the UK on a collision course with the EU’s four freedoms and therefore at odds with access to the single market. That’s why our base case remains a so called “hard Brexit”, but even now our colleagues in FX strategy think investors are not positioned for this. Hence their GBP/USD forecast of 1.15 for Q1/Q2 2017. Finally, a major concern for investors and especially business investment would be if the UK faces a “cliff edge” for trade terms in 2019 (on the assumption article 50 is triggered). While a transition deal would be a potential positive development next year, the absence of such a deal before or soon after article 50 is triggered could be another reason for policy uncertainty to spike higher again. warinige 2 European Equity Strategy |O1 December 2016 27 HOUSE_OVERSIGHT_014486