With fewer than 100 days until the UK’s transition period ends, well-known UK managers such as Richard Buxton, Richard Marwood and Gervais Williams are paying close attention to the impact that Brexit could have on sentiment.
The UK officially left the European Union on 31 January this year. It entered an 11-month ‘transition period’, whereby the UK remains in both the EU customs union and single market – essentially keeping most things the same while trade deal talks continue.
Since the 2016 referendum vote to ‘leave’, UK markets have been enveloped in uncertainty on exactly what Brexit will be like.
The Conservatives’ landslide victory at the December 2019 general election alleviated some of the Brexit doubts, as Boris Johnson promised to ‘get Brexit done’. But whether that was with a deal or not was unclear.
Performance of the FTSE 100 since EU referendum
Source: FE Analytics
Of course, this has now been derailed by the coronavirus pandemic consuming all markets.
But Brexit discussions have picked back up recently as the EU began legal proceedings against the UK after the government failed to remove the Internal Market Bill’s conflicting laws concerning Northern Ireland Protocol. The bill could breach international law and override parts of the previous deal between the UK and EU.
With only a few months left to negotiate a trade deal amidst a global pandemic and strained EU relations, Trustnet asked UK fund managers for their thoughts and concerns regarding Brexit.
One thing several agree on is that the UK market has already priced in a negative Brexit scenario.
Gresham House’s Ken Wotton and Royal London Asset Management’s Richard Marwood both agreed that the UK market is already thinking the worst when it comes to Brexit.
Wotton, who manages the LF Gresham House UK Micro Cap fund, said: “We believe a very pessimistic Brexit scenario is currently priced into UK equities, which trade at a multi-year discount to other developed equity markets.”
Marwood seconded this, adding: “Domestic stocks are certainly out of favour, suggesting the market is taking a dim view of Brexit risks.”
But Marwood pointed out that part of this is to do with the impact of Covid-19, which has been significantly harder on the UK market than on many other countries.
He said: “It is hard to disentangle whether this weakness is due to Brexit worries or Covid-19 worries – many UK exposed stocks are weighted towards travel, leisure and consumer spending, all areas hit hard by Covid-19 restrictions.”
Year-to-date, UK indices have significantly lagged their global peers. Both the FTSE 100 and the FTSE 250 on a significant loss, having struggled to recover from the coronavirus crash back in March. By comparison, many other major markets are back to their pre-coronavirus levels.
UK markets versus global peers YTD
Source: FE Analytics
Also, unlike the US’s tech/growth heavy market, the UK’s is dominated by more cyclical sectors like oil, energy and mining, which are lagging in the current low interest rate, low growth environment.
But uncertainty surrounding the outcome of Brexit is compounding the UK’s inability to gain momentum in a recovery, according to the managers.
Marwood said: “At the risk of repeating an over-used cliché, markets hate uncertainty. With the impacts of Covid-19, uncertainties are abound and Brexit worries only compound that.
“Any clarity would probably be beneficial to the market.”
But only if it is “positive clarity”, meaning that a deal was reached would actually help the UK market, according to Jupiter’s Richard Buxton.
According to Buxton, confirmation of a ‘no deal’ Brexit would be more damaging to the UK even if that technically brings some clarity to what the UK exit looks like.
“Given the fact that both the UK and the EU claim that for practical reasons a deal needs to be agreed within the next month, in order to have time to be ratified by all parties by year-end, the next few weeks are critical,” the Merian UK Alpha manager said.
“My view remains that it is in neither sides’ interests to not agree a deal, but it was also always likely to ‘go to the wire’ in terms of timing.
“So yes, clarity over the outlook for trade with Europe would help, but really only if it is a positive clarity, or in other words, a deal is reached. This would remove a fear of a disruptive exit impacting the UK economy further.”
But while Brexit is undeniably a major domestic event for the UK market, there are bigger global macroeconomic events going on which could have a greater impact, according to the managers.
Covid-19 has undeniably been the market, societal and economic event of the year. Having had far reaching and devasting impacts in every sense Covid-19 is, according to Marwood, more important for markets at the moment than Brexit.
“The impacts of Covid-19 are more of a priority than Brexit at the moment,” he argued. “Every stock we own is having to make some changes to how they operate to cope with the pandemic, whereas Brexit issues are more likely to be concentrated in more UK-focused stocks.”
Currently many countries are going through a second wave of coronavirus infections and there have been more than 1m coronavirus deaths globally since the pandemic began.
Local lockdowns and curfews have been put in place as the UK attempts to regain control of the virus before the annual flu season.
But it isn’t just the ongoing coronavirus in which is eclipsing Brexit negotiations, according to Premier Miton Investors’ Gervais Williams.
“In our view, factors such as the risk of a contested US election result, or more European or Asian Covid-19 hotspots, could have a much greater effect on UK share prices than Brexit over the coming months,” the LF Miton UK Multi Cap Income manager said.
“In fact, if Brexit doesn’t lead to many problems, we anticipate that asset allocators could close their UK underweighting and hence the UK market could outperform over the new year.”
With US companies dominating global markets, the fallout of the US presidential election is extremely important.
With under a month to go Joe Biden is still in the lead, according to the polls. If this comes to fruition, Biden’s promised corporate tax increase could have a significant impact on US tech companies, which could spill over to global markets.
Williams said: “We haven’t made many investments in the LF Miton UK Multi Cap Income fund based upon Brexit, because we worry that the adverse investment risks of other events, such as a potentially contested US election result, or an adverse geo-political event in Asia or the Middle East, is rather larger than Brexit.
“Companies have had some years to plan for Brexit, and in general those with significant challenges have put in place plans to address the problem.”