The triggering of Article 50 – the mechanism for exiting the EU – by the UK government has seen mixed reactions from markets and fund managers.
The move follows last June’s referendum result in which 17.4 million people voted to leave the EU compared with 16.1 million who voted to remain in the bloc.
Since the result – dubbed Brexit – sterling has devalued against major currencies. In this morning’s trading, despite having slipped initially, the pound recovered to stay stayed steady against the euro in early trading.
Performance of sterling vs euro since the referendum
Source: FE Analytics
Peter Hensman, global strategist and member of the real return team at Newton Investment Management, said: “The triggering of Article 50 as the UK government formally notifies its European partners of the intention to begin negotiations on Britain’s departure from the EU is undoubtedly a significant event, but the reality for markets in the short term is that it provides little new information.
“While the value of sterling has already fallen considerably, more belligerence in the early skirmishes between the two sides could well see the value of the pound slip further, especially if fears mount that no deal will be forthcoming.”
Howard Cunningham, fixed income portfolio manager at Newton Investment Management, adds that the triggering of Article 50 was unlikely to have significant impact on the UK gilt market.
He said: “We certainly see no rational reason why the triggering of Article 50 should be a genuine shock which causes sterling to sell off and gilt yields to collapse, although we should expect more volatility ahead.
“Overall though, gilts have remained highly correlated with other major government bond markets since the vote for Brexit last summer.”
Veteran investor Paul Mumford, senior investment manager at Cavendish Asset Management, says with looking “pretty unattractive” at negative yields and with a rise in inflation and the fall in sterling, a move into risk assets such as equities was more favourable.
He said: “On the whole the triggering of Article 50 shouldn’t be taken too negatively and if the market does see a huge downward reaction it’s also a good opportunity to buy the shares that have been negatively affected.
“The market will take the uncertainty of the negotiations it in its stride and there will be very little change in the long run.
“Over time, I expect the pound to recover, but in the short term the depreciation of sterling will benefit UK exporters, make the UK a more attractive environment for overseas investors and put pressure on inflation through higher input costs.”
He added: “In the UK, the FTSE 100 sees a large proportion of its earnings come from overseas so it has a measure of protection there, and in the smaller end of market companies are more nimble and more adaptable to change – so as well as creating uncertainty, the Brexit negotiations are also producing opportunities for companies.”
Since the referendum result, the UK blue-chip index has broken new highs as investors have sought safety in more liquid, internationally focused large-caps.
Performance of the FTSE 100 vs FTSE 250 since the referendum
Source: FE Analytics
Soaring above the 7,000 mark, the index has been further boosted by increased optimism in markets since the election of Donald Trump as US president, who made a number of pro-growth policy promises during his campaign.
The FTSE 250 has not grown as strongly as its sister index, with many investors eschewing smaller more domestic-focused stocks.
However, Harry Nimmo, manager of the Standard Life UK Smaller Companies Investment Trust, says the triggering of Article 50 was unlikely to affect the long-term investment argument for small-cap investing.
The FE Alpha Manager said: “Essentially I’m indifferent to the triggering of Article 50. Our investment process starts with stock selection.
“History has demonstrated that our kind of lower risk growth-orientated companies can generally flourish regardless of the direction of macroeconomic change.
“Indeed, our companies tend to come into their own in uncertain economic times. They are often outward looking with business models that thrive beyond our shores, irrespective of exchange rates and trade barriers.”
Despite a more subdued reaction to Article 50, there were signs that the two-year process may be a fraught process as news broke early on that EU regulators had blocked the London Stock Exchange Group’s £21bn merger with Deutsche Börse.
The deal, which would have merged Europe’s two largest stock exchanges, was blocked by the European Commission under EU merger regulation.
Margrethe Vestager, EU commissioner with responsibility for competition policy, said: “The European economy depends on well-functioning financial markets.
“That is not just important for banks and other financial institutions. The whole economy benefits when businesses can raise money on competitive financial markets.”
She added: “The merger between Deutsche Börse and the London Stock Exchange would have significantly reduced competition by creating a de facto monopoly in the crucial area of clearing of fixed income instruments.
“As the parties failed to offer the remedies required to address our competition concerns, the Commission has decided to prohibit the merger.”
Performance of LSEG vs FTSE 100 over 1yr
Source: FE Analytics
In a market announcement, the London Stock Exchange said the merger would have created a “world leading market infrastructure group anchored in Europe, which would have supported Europe’s 23 million SMEs and the development of a deeper capital markets union”.
The group said it would initiate a £200m on-market share buy-back, an amount it said was broadly equivalent to the return it would have made had the merger gone ahead.
Neil Wilson, senior market analyst at ETX Capital, says the referendum had “effectively killed this deal off nine months ago”.
He said: “It brings to an end a fairly dubious history of proposed mergers for LSE at the same time. Its future looks to be, like Britain’s, outside of Europe.
“The response from investors is positive with LSE shares jumping more than 3 per cent on the news before pairing gains to trade up 1.5 per cent.”