Negative indicators around Brexit now point to a slide in shares
WITH just hours to go until the do or die deadline for Brexit, it looks extremely unlikely the October 31 date will be achieved. With a flexible extension being hinted at, it seems that the process will be drawn out even further with a final end of January target.
The whole process has proved to be a frustrating and complicated one and has already had an impact on the UK economy.
In the short term, there can be little doubt that the uncertainty caused by Brexit (and lack of progress) has resulted in a great deal of uncertainty, which in turn means that companies have been encouraged to delay capital spending until they have more clarity about the environment in which they will be operating.
Once a deal is reached, this may provide a short-term boost to the economy as companies unfreeze their spending plans, but this is unlikely to be the end of uncertainty as the next question will be concerning what sort of trade deal will be secured with the EU.
There is also a view that longer term Brexit will reduce growth in trade as there is likely to be an increase in customs checks even if we have a free trade deal with the EU and there is no guarantee that other trade deals will be sufficient to offset this.
Relating more specifically to the stock market, there are some negative indicators which now point to a slide in shares. Firstly, the ratio of the global money stock is unusually low, pointing to investors being overweight in equities and underweight in cash. This usually leads to a fall in the market over the subsequent 12 months.
The second indicator is that non-US investors have started buying US equities again after months of selling. This points to a high level of confidence, often a sign that equities are at a peak.
Thirdly, the gilt yield curve is now inverted, which means that 10-year gilts yield less than three-month money and this is also the case in the US. This indicates the expectation that interest rates will fall because investors expect a weak economy.
There is, however, a more positive view of the market. UK equities are abnormally cheap compared with peers, which has been the case since investors veered away from them in the wake of the referendum in 2016.
Three years on the FTSE 100 is 25 per cent cheaper than pre-referendum levels based on forward earnings multiples. Over the past decade we have seen a swing away from value stocks towards growth stocks, a global phenomenon, but there have been signs recently that this is changing.
The UK has a strong value composition of stocks with low ratings, high dividend yields and a propensity to return cash to investors; this should benefit from a global rotation unrelated to Brexit.
These are only some of the arguments on both sides. This is without doubt a complex situation which is constantly changing and there are, of course, no guarantees.
:: Cathy Dixon is a partner at the Belfast office of Cunningham Coates Stockbrokers. This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise.