Business

UK markets leading up to Brexit

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IN 2016, I found it difficult to type the ‘B’ word – Brexit. Then it became the ‘C ‘word Covid and I nearly thought were going to have the ‘D’ word Donald! I would have learned Mandarin after that.

It's been four years of tap dripping psychological torture, but stock markets do not seem to mind, apart from the UK domestic market as pointed out last week.

I had seen numerous columns talking about how the UK market had performed but referring to the FTSE 100.

The FTSE100 is a heavily internationally weighted stock market and reflects the UK economy as much as the personality of a UK politician reflects anyone I know sat at the bar concerned about the wellbeing of their families. The FTSE 250 and 350 is a better measure.

We were led to believe that the UK election would bring certainty, that the avoidance of a ‘hard left’ government, along with Brexit clarity would have the above domestic stocks flying.

In reality, GDP (measure of the economy) plunged 20 per cent compared with an average of 12 per cent in Europe. Markets, themselves diverged also, particularly from May where the rest of the world powered on and the UK went backwards.

As I explained last week, much of that is due to the Covid handling and the complete lack of clarity of Brexit.

A new word was introduced to me over the lock down: ‘Caetextia’ - context blindness, caused by an inability to keep track of multiple interconnecting variables and to reprioritise any change in those variables by referring to a wider field that contains the history of them.

That seems to me to be a potent pandemic and has paralysed society and its thinking, creating extraordinary confirmation bias. Visit any social media debate to witness this first hand.

The result is that society can resort to either logical straight-line unbending thinking, or thinking by just random associations.

Such thinking has us selling out of the wrong stocks at the wrong time and vice versa.

Similarly, why does a global cinema chain’s share price rise over 100 per cent on the talk of a poorly tested vaccine, even though that chain is looking at a company voluntary arrangement and cinema closures? Maybe they know different?

Last week the UK benefitted significantly by this news and such a suppressed stock market (think of an elastic band pulled downwards) is being tagged as one area that would benefit more than most, if there was a decrease in the threat of the virus.

Remember this is a nation that had net outflows in funds invested in its markets of £1.1 billion and £912 million in June and July this year.

I have previously mentioned the difference between the best global manager’s investment performances for £100,000 invested since the year 2000. One lost nearly £5,000 and the other returned over £1 million.

How can this be so?

You should be aware that not all managers are dynamic and move their allocation between different sectors quickly. Some not at all.

In fact in many old style pension schemes the old asset allocation still applies, with large holdings of in excess of 50 per cent in the UK still obvious.

That seems strange when you see that the world index only allocates 3.45 per cent to the UK.

Preparing for what this next last stage may bring your investments is everything, and you should ensure your fund manager is well equipped for it.

For UK equities, the worst-case scenario is a default to World Trade Organisation rules with tariffs and barriers to trade. This would be horrific for the UK, so you can see why the UK market is pricing some of this possibility in.

Half of the UK’s imports in 2019 came from the EU and 40 per cent of its exports went there.

Border queues, high friction trade! It’s hard to see why any politician would allow it but see my point above re Caetextia.

The key is speed of movement and balance to your portfolio, and the better managers do that well. Make sure you are positioned accordingly.

Peter McGahan is chief executive officer of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a complimentary consultation on your investments, call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net.