Business

(Dis)orderly Brexit, (dis)orderly investments

Ivanka Trump at a state dinner during Chinese president Xi Jinping's first meeting with Donald Trump in 2017. She has just been granted five trademarks from China for a ‘defunct” company she owns
Peter McGahan

SO what's likely to happen to my investments particularly in light of the 2018 market downturn and a Brexit deal?

Last year was torrid for most investors with virtually no equity markets producing a positive return. Geopolitics are at a level I've never experienced in my entire life for sure, but more importantly, so has trust in the data we are presented with.

Take today: On the one hand Trump is quoted stating the US is doing “very well” in China trade talks, on the other (six hours earlier), his inside adviser says there will not be a breakthrough in talks soon. Meanwhile his daughter (in the midst of US negotiations) has just been granted five trademarks from China for a ‘defunct” company she owns!

Try making sense of that when deciding your investment strategy. The same could be said about the relationship with Korea, moving from haters to lovers in a split second.

China will play out quicker than the inside adviser states I'm sure, but so will the response in markets when it does.

A key for investors is the potential impact on the UK stock market (ie UK stocks as opposed to the global stock market), a market that is regularly being touted as overlooked.

The options are a ‘no deal', or a range of alternatives grouped as ‘orderly Brexit' or no Brexit at all.

A no deal is a catastrophe for the UK stock market in the short to midterm (I can't look beyond that) which would inevitable lead to a general election, and potentially to a Labour government under Jeremy Corbyn.

(Politics aside – it's not the point here), UK domestic markets would fall, as would sterling, and be as attractive as a date with Trump.

With that, as a net importer, inflation would rise, and so too would the pressure to increase interest rates.

This takes more money out of the net disposable income of the consumer, who has already been fuelling spending by borrowing. That can't continue, and the tightening of belts would of course impact retail and spending as a whole.

Protection in the UK market, or a ‘hiding place' in your UK equity portfolio? Large cap stocks such as the FTSE100 with solid earnings (and over 71 per cent of earnings outside the UK) will be a go to and will benefit from the fall in sterling.

There has been considerable net outflows from UK financial assets over the last year and UK growth currently lags close to the bottom of the G10 major economies.

A no deal could have real impact on these assets for three to five years.

Orderly, or no Brexit with no general election? Undoubtedly, a rise in markets and in particular local markets; an upward surge in sterling; pressure off and controlled inflation, which would then only be coming in for the correct reasons (i.e. spending); pressure off interest rates.

General wellbeing in the UK? Anything that means we don't have to talk about it again would be a release valve. It's been atrocious, and ‘politicians' have been a disgrace, whilst families have been torn apart by misinformation, and then repeating that information at the table or ‘socially'.

The truth is, the UK domestic stock market (ie smaller and mid cap stocks) hangs on a bit of a knife-edge and the knife-edge has no real hiding place right now. If its bad news, it's ‘going to hurt'.

The forward price earnings (P/E) ratio (ie price of a company versus its true earnings) on local domestic stocks in the UK (c17x) is significantly higher than the FTSE100 P/E ratio of under 12 times earnings.

But, if it moves positively (orderly Brexit or no Brexit), expect a strong rally as earnings will be re-forecast upwards and investors return from both the UK, and those abroad, looking to benefit from the rise in equities and sterling (double whammy on returns). The P/E ratio in 2015 was over 26, so an uplift in earnings growth and sentiment gives it a long way to go.

The knife-edge would be speedy and overnight with simply the correct words from governments and/or the Central Bank.

If you have great insight into the deal/no deal and are prepared to take the risk, the opportunities in those undervalued assets, battered over the last thirty months are there for the taking.

:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a question on investments or pensions, call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net

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