October 3, 2018
In the lead up to the June 2016 referendum, polls suggested the result to remain in the European Union was likely. However, the pendulum swung, and the resulting vote has led to over two years of uncertainty – a word we have become accustomed to when talking about UK markets with clients.
Many saw Brexit as ‘bad news’; the FTSE 100 fell to below 6000 (intra-day) the day after Brexit, while sterling plummeted against major currencies. The former of these reactions was short lived, as the subsequent weakness of sterling benefitted many of the FTSE 100 companies, dominated by international earners (according to a 2018 London Stock Exchange report, 70 per cent+ of revenues of FTSE 100 companies are derived from international markets), and confirming more so the benefits of diversification in portfolios.
The noise surrounding Brexit is getting louder and in an attempt to ‘settle the boat’, Mark Carney announced he was to stay as Bank of England (BoE) Governor until January 2020. Despite a slight tailwind to sterling through the EU’s Chief Negotiator Michel Barnier’s six to eight week prognosis for a deal, the future of the UK’s divorce from the EU remains blurred.
Opinions have circulated in recent days that a hard Brexit could lead to a severe economic slowdown, rising unemployment and a housing price slump. The ghost of the 2008 financial crisis has been rumoured to be replicated, but unlike ten years ago, the BoE doesn’t have the scope to cut interest rates, nor implement Quantitative Easing to help support the economy.
Prime Minister Theresa May resumed discussions with EU leaders at a summit in Austria in September, the first of three likely summits over the coming months as the March 2019 deadline looms.
Equity markets are effectively leading indicators of future economic and company specific performance. London indices have more than recovered since the initial Brexit reaction (FTSE 100 +c.30 per cent), aided as such by global economy strength. These businesses are not as exposed to a UK centric downturn, but in the instance of oil and miners in recent weeks, they have been victim of US President Trump’s war of words with China and Iran. It only leads to further evidence of the benefits and protection from a diversified portfolio.
What we do expect is that a hard Brexit would add further pressure to sterling (a net short position against the pound has been building in recent months, suggesting further volatility) while May’s ideal soft Brexit should come as a welcome relief as investors and markets continue with the status quo.
The Irish border situation continues to be a sticking point, the result from discussions merely a prediction rather than facts as we stand. The media are quick to share the doom and gloom of further uncertainty, sometimes adding additional scaremongering.
While we wait with bated breath for the negotiations to come to an end, what remains May’s objective is that the UK will leave the EU on 29 March 2019. To help our clients steer their way through this conundrum, Vertem is hosting a series of seminars throughout the Autumn: Navigating Brexit – Stock picking your way around the Brexit puzzle.
As a specialist research house, Vertem will forecast how markets are likely to react to the various potential outcomes and will explain how to position your portfolios to best protect and benefit your capital from eventual Brexit ramifications.