Brexit Opportunities – 25 July 2019

Boris the PM, what can we expect? Boris sees his mandate as bringing about Brexit and he has overhauled his cabinet to achieve this. However, he still faces all of the Conservative, Parliamentary and European opposition that beset Theresa May so it is difficult to make any assumptions about how the process will evolve.

The more aggressive talk of bringing about Brexit has caused the pound to weaken recently as markets broadly perceive Brexit to be economically bad for Britain. However, the overhang of Brexit has already caused economic growth to falter as companies remain reluctant to invest when there is so little certainty around Britain’s future. There is consequently a feeling in certain quarters that there needs to be some form of Brexit deal so that we can all move on rather than remain in limbo. Some certainty over the future should encourage businesses to invest again and investment conditions could be made especially favourable when powers are returned to parliament.

Overseas investors have avoided UK equities because of the political issues, including the possibility of a Corbyn government, although this seems to have lessened recently according to the polls, and we view UK stocks as being cheap in a global context. Valuations in the often smaller, more domestically-orientated companies are cheaper still and we have heard several fund manager stories of good UK businesses on what appear to us to be incredibly-low valuations.

Brexit, should it happen on 31 October, may well be painful in the short term but markets appear to be pricing a lot of this in already. Given the consensus end-of-the -world forecasts, there must be a greater chance of a positive surprise. At the same time, if Brexit is postponed again, then the pound and UK stockmarket should be re-rated higher as near-term fears and uncertainty dissipate. Either way, with a lot of bad news now priced into both the UK stockmarket and the currency, we think they are increasingly attractive. We are looking to raise our sterling exposure and with it our allocation to UK smaller companies where we see the most compelling prospects. This is helped by the lack of research in the sector now that the FCA has made it uneconomic for much the investment industry.

With the volatility and emotion that Brexit evokes, we expect to see more sentiment shifts and investment opportunities over the coming months.

Tom Broadhurst ACA CFA

Investment Manager