Brexit Chaos and Market Reactions

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The draft terms of the proposed Brexit agreement were released this week to howls of outrage from both Remainers and Brexiteers – if both sides are united in one thing then that is in their condemnation of the agreement.

Cabinet resignations, including Dominic Raab the Brexit Secretary, have put the future of Theresa May and her Brexit plan at risk.  Even if she remains Prime Minister, the approval of the UK Parliament is still needed.  Amid talk of a leadership challenge, general election and even another referendum, political volatility is likely to be considerably high in the UK over the coming weeks and months and this will continue to create uncertainty in the outlook for the UK economy and markets.

“It’s difficult to make predictions – especially when they are about the future”

The above quotation is attributed to Lawrence ‘Yogi’ Berra, an American baseball player who still holds the record for the most World Series Championships.  In addition to his legendary status for baseball, he also received notoriety for his malapropisms that were seized upon by the journalists of his day in much the same way today’s football reporters follow Joe Mourinho’s press interviews at Manchester United.

I am not going to make any personal predictions about how the final Brexit deal will look and what will happen to markets; instead I will share with you some interesting and up to the minute commentary from the desk of Credit Suisse, from whom we receive subscription analysis and research.

Credit Suisse are maintaining a central scenario that a soft Brexit deal is more likely than the UK crashing out without a deal, although they see considerable UK domestic political stress on the path to an eventual deal.  Their core belief remains that Parliament will avoid a no-deal Brexit.

 Whilst it is very clear that the UK economy is currently seeing some weakness due to Brexit uncertainty, particularly in Sterling, a soft Brexit will allow the Bank of England to sound more hawkish into 2019 on the back of building wage pressures, fiscal stimulus and a likely rebound in growth.  This will support the British Pound and is likely to result in rising UK gilt yields.

Furthermore, Credit Suisse have today re-rated UK equities and are now overweighting the UK market as part of their global strategy.

There has been significant disengagement with UK equities and exposure to Sterling by international investors since the Brexit referendum as evidenced by the two graphs below:

The UK has become so ‘out of favour’ that it has resulted in UK stockmarket valuations of leading ‘blue-chip’ companies compared with international markets now approaching levels last seen at the time the UK tumbled out of the Exchange Rate Mechanism in September 1992.

The P/E ratio is a well-used measurement of the value of a company share price; by dividing the price of the share by the earnings of the company you can calculate how much you have to pay for every £1 of earnings.  The FTSE All-Share Index (this includes a wider range of companies and is not limited to the top 100) P/E ratio hit a low of 7.4 on 5th March 2009 and a high of 34.2 on 5th September 2016.  Generally, it is considered fair value around 13-14.  It is currently at 11.8.

Investors must focus on value and look to the long-term

The most important issue for investors is to remain focused on value and current figures suggest that leading ‘blue-chip’ UK shares are very reasonably valued, particularly those companies who are domestically focused on the UK economy.

Shares in some very long-standing and reputable UK Investment Trusts such as Temple Bar and Invesco Perpetual Edinburgh are trading at significant discounts to their net asset values and paying very good dividends.  We have been and continue to add client holdings to these investments.  We are also increasing our allocations to good quality UK commercial property portfolios.

Over the past two years, investors in the UK stockmarket have not enjoyed the returns achieved by US, European and Asian stockmarkets, but if we can put aside the political chaos that we are currently seeing and maintain commitment to long-term investing, we believe that investors will be rewarded.

We are very happy to share our information and research.  Please do not hesitate to call us on 01494 683100 if you have any questions or email info@2hwealthcare.co.uk