Will UK stocks suffer Brexit blues?

Now that fears are spreading about a ‘no deal’ Brexit scenario, should you dump your UK shares and shift out of pounds?

Plus ça change…

Return from a few days holiday and you often find that many things are exactly the same as before you went away.

The US stock market just keeps on going up. Nothing, it seems, can stop it. I’ve read all the arguments and written about them so many times, there’s nothing I can add.

Actually, that’s not quite true – I’m sure I’ll soon find another reason why Wall Street ought to be stopping in its tracks. But that’s for another day.

Other equity markets, meanwhile, are behaving in a much more lugubrious manner.

Germany and Russia are slipping while China is tumbling. And the UK doesn’t feel too happy either. In fact, the latter is my particular topic for today…

Steering clear of politics

Anyone who’s read my rants in recent years (for which I thank your remarkable tenacity!) will know that I tend to avoid writing about politics.

This doesn’t mean that I don’t have opinions. I do: often quite outspoken ones, too. I’m not sure, though, that apart from deriving the personal satisfaction of standing on a soapbox for a few minutes, I can add much value by expounding my views.

I prefer to assess likely future economic/financial trends and to evaluate what these could mean for your money.

So here’s my present problem.

Brexit.

I’ve always maintained that Brexit is a political rather than an economic or stock market event. In other words, it’s being played out by a lot of posturing politicians who are largely out of touch with the real world. Best ignored.

I also believe that most people want to get on with their lives with as little grief as possible from governments. Most UK citizens will have a view on Brexit. But they also want to enjoy freedom of movement without being hassled by burdensome legislation (last year Thomson Reuters’ legal department found that more than 50,000 laws have been introduced in the UK since 1990 as a result of EU legislation).

In addition, I’ve viewed most corporate warnings about Brexit, e.g. ‘after Britain leaves we won’t invest here’, as sabre-rattling. This country has a population of 66m, almost 0.9% of the global total. No right-minded company is going to close itself off from a market the size of the UK, whether it’s part of the EU or not.

But Brexit is now becoming a financial market issue too. So I am writing about it.

Fears of a ‘no-deal’ – Britain leaving the EU before an official exit arrangement has been reached – have hit the pound. From its mid-April value of $1.42 – almost the same level as just before the June 2016 referendum – sterling has fallen back to about $1.28. Against the euro, it’s drifted back to just above €1.1.

At the same time the FTSE 100, which had been prospering on sterling weakness due to the index’s large number of overseas earners, has joined in the gloom by testing its lowest point since April. Fears have been spreading about major disruption to the UK economy if a deal can’t be struck with the EU.

Which begs the question…

Should you dump your remaining UK shares and shift the proceeds out of pounds?

I don’t believe that would be sensible at this stage.

Here’s why.

For one thing, sterling has already begun to discount a ‘no deal’ situation. Even if this materialises, after an initial wobble our currency could still hold its ground as the realisation dawns on the markets that anticipation is often worse than reality. Anything more reassuring than a ‘no deal’ is likely to prompt a rally in the pound.

Sure, listening to all the rumours and counter rumours, as well as the daily changes in sentiment, it’s hard to figure out what will happen. I believe, though, that those posturing politicians will play their usual game: obfuscate, argue – and then at the last minute, produce a solution that shows how ‘clever’ they are (when all they’ve done is resolve a mess of their own making).

No matter. The pound would recover anyway on a viable deal.

What about the stock market suffering the Brexit no-deal blues?

Assuming a viable arrangement is ultimately agreed, confidence in equities is likely to be restored, at least for the moment.

And if I’m wrong, there’s no deal and sterling continues to slide, I believe that the previous inverse relationship between currency and stocks will re-assert itself. Other things being equal, the FTSE 100’s overseas earners will rebound.

Trouble is, other things aren’t equal. We live in highly uncertain times in which chaos is never far away. Let’s return to the endless bull market on Wall Street. When that finally comes to an end, as it must at some stage, all other equity markets around the world will suffer, including our own. While Brexit negotiations may not be the catalyst for a Footsie fall, a slump in the S&P 500 might well be.

On balance, I believe it’ll pay to keep your cash in sterling so that you can take advantage of the next stock market sell-off – regardless of what causes it.

You may like

In the news
Load More