Brexit is making UK stocks cheap

Brexit uncertainty is pushing down UK stocks. Rather than shunning the UK markets, this could be a good time to buy.

Six months to the Brexit deadline, politicians on both sides of the English Channel are losing their cool.

“Liars!” shouts French President Emmanuel Macron to hubristic Leave campaigners who claimed Brexit was a piece of cake…

“Stalinists!” retorts Foreign Secretary Jeremy Hunt to EU leaders in an attempt to sink even lower than his predecessor Boris Johnson…

“Suicide vest!” that same Boris Johnson writes in his weekly Telegraph column because he needs to say outrageous things to stay relevant.

What a privilege it is to watch the crème de la crème of politics in action!

Kidding aside…

With the deadline for a deal approaching, all this noise doesn’t make investors particularly confident about the UK markets.

UK stocks are being punished across the board over the uncertainty caused by Brexit.

You might need a strong stomach to invest in the UK markets right now, but this could actually be an excellent moment to buy UK stocks.

As Jon Sindreu puts it in the Wall Street Journal, “Brexit is a buy for the brave”.

Investors shun UK stocks

Has there ever been an issue that’s received as much coverage as Brexit?

It’s on the news almost every day. Newspaper after newspaper gets filled with news and commentary on the UK’s departure from the EU.

At times it feels like nothing else has happened for the past two years…

With something so all-absorbing, it’s normal that any news on the matter – good or bad – has an outsized effect on the markets.

Lately, the pessimism about the current state of affairs has been carried a little too far.

It’s succeeded in turning the age-old negative correlation between the pound and UK stocks positive.

The rule used to be that a fall in the pound’s value would give the FTSE a lift. That’s because overseas earnings of global UK companies are boosted by a weaker pound.

But in August that inverse relationship became a direct one. The index fell by 2% as the pound weakened by roughly 2% as well.

Small and medium-sized UK companies have been affected the most in the stock market. They tend to be more vulnerable to domestic risk than blue chips.

Their shares have fallen to their lowest level since 1996, relative to shares in other developed markets.

Even multinationals listed on the FTSE 100, which make much of their money overseas and are less exposed to domestic trouble, are trading at a discount.

Bank of America Merrill Lynch asked a bunch of fund managers about their investment choices last month.

No less than 42% of them think their holdings will be biased against UK stocks over the next year. That’s quite a lot, especially since less than 20% seems worried about Italy.

“With the deadline for a Brexit deal now six months away, many international investors have become bored with the impenetrable political back-and-forth, making the UK equity market the most unloved in Europe,” argues Jon Sindreu in the WSJ.

It looks like the downside risk of the UK crashing out of the EU without a deal is weighing heavy on the minds of investors. They’re not taking any chances.

Keep calm and carry on

But wherever there’s difficulty, there’s opportunity a wise man once said…

The trick is to tune out all the noise and focus on what’s really important, like a company’s share price compared to its earnings.

Commodities speculator Richard Dennis, who is said to have turned $1,600 into $200 million, has a curious strategy: trade with a hangover.

It takes the emotion out of investing, he says. You’re unmoved by all the excitement around and act more mechanically. It’s the best way to keep sentiment at bay.

I’m not suggesting you keep a cooler next to your sofa and drink until you pass out, only to wake up with a throbbing headache. I doubt that tactic works for a lot of people.

But closing yourself off from all the Brexit news, which the media turns into Shakespearean drama, does sound like a winning strategy.

Right now the market may feel overly bearish with all the talk about a no deal Brexit, even though the odds of that happening are still minimal.

Let’s not get carried away, says Sindreu. There are still plenty of reasons why you could do a lot worse than invest in UK stocks right now.

“As gambles go, betting on one of the world’s richest and best-connected countries as it revises its trade arrangements should seem less risky than betting on the fate of the emerging world, or arguably even Italy’s growth potential within the eurozone.”

Keep calm and carry on, agrees Income For Life investment director Greg Robinson:

“There is likely to be at least a last minute fudge to save the day. Look to the Canada/US NAFTA deal that was just concluded on the last day of negotiations.

“The EU are masters of last minute deals. In that case there could be lots of upside.”

It’s true that the markets don’t like the uncertainty that’s been hanging over the UK for years. And increasingly bitter-sounding politicians on both sides are not helping.

But the risk of a no deal Brexit is being overstated. This creates opportunities for investors to get in the UK market before a relief rally is bound to lift stocks higher.

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