Brexit – Hard or Soft – Who Are The Winners

Fri 23 Oct 2020

By Brian Dennehy

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Fund analysis

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protectWhether the UK experiences a Hard or Soft Brexit remains to be seen. In light of this uncertainty, here we explore the implications of these two possible outcomes for UK stock markets, investors and the economy as a whole.

What will a Hard Brexit mean for stock markets and investors?

The pound and UK stock markets are likely to fall.

The UK will be even more cheap than it was around the December 2019 election and in March 2020 during the pandemic.

From an investor perspective, broadly speaking, this would be a good time to buy into the UK.

Winners in a Hard Brexit?

A depreciation in the pound would make the UK economy more competitive.  This is because UK goods will be relatively cheaper abroad, allowing UK exporters to sell goods more cheaply or increase their profit margins.  That could help with early trade “wrinkles”.

Several companies quoted on the UK stock market, such as pharmaceutical and commodity companies, have their earnings in dollars, which is likely to become stronger relative to the pound.

Of course these benefits of the weak pound assume there will be sufficient demand from overseas for UK goods, which in the short term might be hampered by adjusting to WTO trade rules. Accepting this possibility, the weaker pound can boost economic growth through increasing UK exports, at least in the long run.  It was also encouraging that today a trade deal has been announced with Japan.

Foreign buyers of UK assets will get a boost.  For example, overseas buyers of UK property, which has always been a favourite, and not just for Russian billionaires.  It will also encourage global investment banks to look to the UK stock market for potential takeovers – that will be a powerful motor in currently cheap sectors.

Conversely, UK investors will get a boost from investments in overseas funds, whether American, Asian or European. A recent blog, Winning Funds For A Weak Pound, expands further on this and provides some investment possibilities.

Overall, our sense is that stock market weakness on a hard Brexit will be an opportunity to buy what is cheap, but even more cheaply.

What will a Soft Brexit mean for the stock markets and investors?

The pound and UK stock markets are likely to rise.  To a large extent this will be because there will be greater confidence about the UK as an investment destination (even though the higher pound won’t help!) and because one persistent source of uncertainty, since the referendum in 2016, has been removed.

From an investor perspective, you will probably have to move fast to catch the early upward adjustment in the UK stock market.  In particular look out for Value funds moving.

Winners in a Soft Brexit?

There will be far less trade disruption, with UK-EU existing trade rules remaining relatively unaltered.

A stronger pound would decrease the price of imported goods, so consumers and businesses who rely heavily on imports would be better off.

This leads on to foreign direct investment which would likely continue, and potentially increase, into the UK. Along with the benefits of more trade, this investment plays an important role in lifting economic growth by creating jobs, raising productivity and increasing corporate tax revenues.

The fact that global investors are under-invested in the UK will be a big driver once the UK stock market begins a sustainable recovery.  The unpopularity of the UK was highlighted in this slide from the last teleconference:

After oil, the UK is the most hated investment destination on the planet!  If you want to buy hidden value, and unappreciated potential, this is one of the best possible cues for an investor.

Other Key Considerations

The UK economy and its stock markets are not in a vacuum! Along with the form that Brexit takes, you must take into account the coronavirus pandemic and happenings in the US. Here are a few thoughts:

·         The UK faces the possibility of a national lockdown in the next few weeks, and this would stunt the UK economy’s recovery.

·         US stock markets are extremely vulnerable, even more so now having struggled to control the virus and the approaching US presidential election.

·         A Biden win is likely to come with a rise in corporation taxes in the US making overseas markets, including the UK, a relatively more attractive investment proposition (all other things equal).

In this time of great uncertainty, do make sure you are keeping tabs on the possible events discussed in this piece, whether to protect current investments, or being ready with cash for emerging opportunities.  The next few weeks will be very telling, and not just for Brexit.

 

                                              

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