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Square Mile’s Broomer: We’re not going to bet on a Brexit outcome | Trustnet Skip to the content

Square Mile’s Broomer: We’re not going to bet on a Brexit outcome

09 December 2020

Jason Broomer, investment director at Square Mile Investment Consulting & Research, explains why the firm won't change its stance on UK equities until it becomes clear what the post-Brexit landscape will look like.

By Rob Langston,

News editor, Trustnet

While investors continue to speculate whether a post-Brexit deal will be agreed by the end of the year, Square Mile Investment Consulting & Research investment director Jason Broomer says the consultancy won’t be making any changes to its UK equity allocation until there is greater clarity.

Broomer (pictured) said it would be taking too large a political gamble to change its stance on UK equities while there is no clarity on what the post-Brexit landscape will look like.

The UK already faces extraordinary pressure from the fallout of the Covid-19 pandemic, he said, which will likely be exacerbated as the Brexit transition period comes to an end.

Highlighting the Office for Budget Responsibility’s recent estimates (as the below chart shows), Broomer noted that huge sums have been spent by the UK government having initially failed to deal with the pandemic appropriately.

“Even just looking at the direct costs – the medical costs – [they] are enormous,” he noted. “And the UK seems to have massively overspent, compared with many other countries, on things like PPE [personal protective equipment] as it tried to catch up.

“I think JP Morgan is talking about the UK spending about £54bn combatting Covid over the last 12 months. And you can compare that to somewhere like Germany [which] spent about half that amount.

“The testing regime, which they’re talking about bringing in the UK, and some of the numbers being bandied around… are just huge sums of money.”

 

Source: Office for Budget Responsibility

And while the short-term impact of the coronavirus on the economy could be as high as 6 per cent, that’s nothing in comparison with what a no-deal Brexit could do to the UK economy, said Broomer.

However, the faltering trade negotiations between the EU and UK over the past few weeks are reminiscent of other trade negotiations involving the bloc in the past, particularly with the Canadian trade deal – CETA – which was agreed at the last minute.

“If you look through the history of all EU negotiations, the compromises only really start to come through in the last few hours of the available time,” he said. “Your guess is as good as mine over whether they’ll be able to cobble together a deal by the end of December.

“Most people would hazard a guess that there’s a two-thirds chance they will be able to manage it because it’s in the interests of everyone else to do it.

“But there is also a one-third chance that they’ll just walk away and say ‘no, terribly sorry, we can’t come to an agreement, we’ll just go to WTO [World Trade Organization] terms’.”

And while Covid had a much quicker impact on the economy, especially in the services sector, the effects of Brexit are “much more of a slower burn” and will be broader, said the Square Mile strategist.

 

As such, while no longer underweight UK equities, the consultancy is not bullish about the prospects for domestic equities currently.

“We’ve been underweight UK equities in our portfolios ever since the referendum,” he said. “And that’s been a very good decision.

“When the FTSE started to fall down to about 5,500/5,600 in October, we started to moderate our underweight positions and we’re now much more neutrally positioned in UK equities.”

Performance of FTSE 100 YTD

 

Source: London Stock Exchange

He continued: “The areas that we focused on have been in the FTSE 100 which are less sensitive to a bad Brexit outcome. Some 75 per cent of their revenues come from abroad.

“We’re not prepared to make a more, frankly, political gamble to say ‘well, we were going to end up with a good Brexit or bad Brexit’. We still don’t know.

“We’re waiting and seeing, and we will address our UK positioning once we get a determination of how the land lies in the post-Brexit world.”

It’s not just the UK where the consultancy is neutrally positioned: it is in the US too and has underweighted the mega-cap technology stocks that have driven performance for much of the past decade.

Broomer said momentum has driven valuations of the big technology names too far, particularly as the sector faces regulatory headwinds under Democratic president-elect Joe Biden could put an end to some perceived anti-competitive practices that the tech giants currently enjoy.

He said: “There are risks in that area coming from politics and antitrust legislation principally and there could be some more regulation on how these companies operate in their respective fields.

“Things like Facebook and Google [the consumer-facing brand of Alphabet] have a free hand to advertise, very often to children. And lots of other media – such as TV adverts – are highly regulated when they’re advertising to children, but these [regulations] don’t apply to companies like Facebook.

“Is that really a level playing field?”

However, Biden may not be able to get things all his own way after the Democrats failed to secure a majority in the Senate, said Broomer, and could rein-in any measures that might have too much of a negative impact on markets.

“Without control of the Senate, Biden is quite hamstrung with what he can do domestically,” Broomer explained. “He would clearly like to lift taxes on the wealthy, but the Republicans are very unlikely to allow him to do that if they control the Senate.

“So, a lot of the spending packages [announced during Biden’s presidential campaign] are going to be heavily diluted and any he puts forward are going to have to be acceptable from both sides.”

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