Barney Hawkins, Investment Director, presents a look at the latest Brexit developments.
If the constant barrage of Brexit shenanigans has left you bamboozled: if you don’t know your indicative motion from your meaningful vote and if the prospect of another two years of this is sapping your will to live – don’t despair. Everyone else is feeling the same way.
There’s a line in Macbeth, ”Confusion now hath made his masterpiece”. Written six hundred years ago it perfectly describes the current impasse in Parliament.
I don’t intend to give a blow by blow account of what has happened so far in this saga or how we think Brexit will pan out. There’s no shortage of information on that score and things are so uncertain and moving so quickly that any commentary is likely to be out of date as soon as it is published.
However, amidst all the hand wringing and sound bite politics we thought it might be useful to share what we and our manager partners are doing while Westminster bickers over deal or no deal, Canada plus, Norway plus plus and the relative merits of long or short extensions to Article 50.
So, what are our managers doing?
Well, as ever, there is a diversity of views. Most are confident of some sort of deal emerging but, like the politicians, they have little in the way of concrete thoughts about what that deal may be or how we get there.
Almost all regard the pound as under-valued and likely to appreciate from its current level of £/$1.33. That said, if we see a disorderly exit come March 29th, sterling could see a short term drop to around the £/$1.20 level before recovering.
Interest rates are unlikely to move from where they are now at 0.75%, especially given all the uncertainty at the moment. However, the UK economy is in surprisingly good shape and interest rates are below where they should be given current levels of inflation and economic growth. Within the economy, companies have held off investing, they haven’t been spending, and there exists a lot of pent up demand which should be released as soon as there is any sort of clarity around the terms of our exit from the European Union. So, we would expect rates to be 0.25% or 0.5% higher by the end of the year at 1.00% or 1.25%.
There is also widespread acknowledgement that the UK is very attractively priced at the moment. UK equities are universally unloved and offer very good value. The main index is trading on valuations not seen since 2012 and you can lock into a dividend yield of 4.2%.
There is some caution around the large, multi-national, blue chip companies of the main index. They derive around 70% of earnings from overseas markets and currency movements can affect their numbers. However, they are well insulated from the trading effects of the UK leaving the European Union and, ultimately, should not be significantly affected by our departure.
The smaller and midsized companies that make up the 250 index are more reliant on domestic demand and tend to be less affected by currency movements. Sure, there will be winners and there will be losers but businesses will adapt and at the moment there is a general aversion among investors to holding UK assets. So, on any sort of clarity the UK market should recover strongly.
March 29th has obvious significance in the Brexit negotiations and it would be lovely to think that the fog will clear at the end of the month.
However, it looks likely that there will be an extension to Article 50, delaying our departure, and after that a two year transition period. It will also take time to acclimatise to the new trading environment so the uncertainty isn’t going to disappear any time soon. It will just change.
What we’re doing is remaining diversified, focusing on the long term and most importantly, not losing sight of the great opportunity in the market that this process has unearthed.
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