We thought we may finally be heading for some sort of resolution to the Brexit Saga this weekend. But Super Saturday turned into Setback Saturday and we still have no agreement.
The good news is that ‘no deal’ seems less likely. The government doesn’t want it, parliament doesn’t want it and Europe doesn’t want it. As this risk continues to fade, the pound (which is already up a little bit today) could rise further along with government bond yields, as investors anticipate a ‘better’ economy and a firmer monetary policy in due course.
But the bad news is that we are still in a state of limbo. There will be more debate and more delay – assuming the EU grants us our churlishly requested extension. And, assuming we get some sort of deal in the next few months, we then still have a transition period until at least the end of 2020 – another 12 months or so in which we’ll be trying to hammer out the details on a trade deal.
The most likely outcome in the coming days, as we have said, is an extension and a status quo. We may see a small rise in the pound (as we have done over the weekend), as the immediate fear of a no deal abates, but this may only be temporary. The length of the extension will be an important factor, as will the possibility of a general election being called.
A deal, as and when one is reached, is likely to result in a stronger rally in the pound. Domestic UK stocks, particularly cyclical stocks such as banks and housebuilders are likely to do better, as are small and medium-sized UK companies.
On the other hand, larger UK companies, which receive most of their sales from outside the UK are more likely to struggle as sterling rises. However, this may only be short-lived too: UK equities have been unloved for a long time now and any clarity over the future of the UK economy may well mean that investors return to our shores picking up bargains along the way.
With this in mind – and with the caveat that volatility is likely to remain as news ebbs and flows – investors might like to revisit their UK equity allocations in their portfolios to make sure they won’t miss out on any eventual change of fortunes.
Funds like JOHCM UK Dynamic and Liontrust Special Situations on the Chelsea Selection are multi-cap options that spread the bet somewhat with their holdings in large, medium and smaller companies across the board.
For those wanting a more adventurous choice, funds with a bias towards smaller companies, like MI Chelverton UK Equity Growth and Montanaro UK Income, also on the Chelsea Selection, may be worth a look.
And finally, if you are suffering from ‘Brexit Boredom’, you may like to know that Sky News launched a Brexit-free version of its news programme last week.
Research by Reuters Institute has found that one in three Brits are now switching off the news as a direct result of the constant Brexit updates that don't seem to change anything (note to self), so the new channel will air every week day from 5pm to 10pm.
Comcast, Sky’s parent company, is a top ten holding in Artemis US Extended Alpha…
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. James's views are his own and do not constitute financial advice.