The lack of clarity surrounding Brexit negotiations has been one of the biggest headwinds for the UK market over the past 18 months, but it may not be as big a challenge as many are anticipating, according to several commentators.
Trying to forecast what type of Brexit might be negotiated and what impact this may have on the market has been one of the biggest challenges for UK investors since the UK voted to leave the EU in June last year.
Additionally, a lack of reliable newsflow as well as ongoing political uncertainty following this year’s general election that returned a weaker government majority than anticipated have helped to create a difficult investment environment.
Despite this, the FTSE All Share index has risen by 24.46 per cent since the referendum last year.
However, the index has lagged global peers over this period and underperformed the MSCI World index by 6.97 percentage points over the same period, as the below chart shows.
Performance of indices since EU referendum
Source: FE Analytics
Market performance has been inhibited, somewhat, by low economic growth.
Although the UK economy has continued to expand it has done so at a much slower rate than other developed economies. It has also been hindered by higher inflation as sterling fell and wage growth remained stubbornly low.
And the outlook has remained less positive. At last month’s Budget, chancellor of the exchequer Philip Hammond highlighted findings from the independent UK Office for Budget Responsibility showing that growth could slow at a faster rate.
Yet, the effect of a wider economic slowdown on consumers and the market has started to be questioned.
He said: “The significant underperformance of sterling-based investments and the sharp decline in the currency supports a view that Brexit is an accident waiting to happen for the UK economy.
“This bearish view is not my central scenario. Brexit brings with it all the uncertainties that politics can throw up, but I believe it is highly unlikely that the negotiating process will end in stalemate. 
“Even now, at the height of the uncertainty, the UK economy is performing robustly.”
Indeed, Jonathan Loynes, chief economist at consultancy firm Capital Economics, said there was “little evidence of any general uncertainty effect” and any that had occurred had been less damaging to the UK than anticipated.
He explained: “Expectations that the growth of the UK economy will slow further in 2018 appear to assume that Brexit-related uncertainty will have a more damaging impact next year.
“But there is a growing chance that uncertainty will ease, perhaps helping growth to speed up rather than slow down.”
Loynes said the consultancy’s own measure of uncertainty had fallen back to levels consistent with faster, not slower, GDP growth.
He said the prospects of a further decline in uncertainty have increased as progress in negotiations has been made and the move towards trade talks inches closer.
“Of course, the path to Brexit will continue to be uncertain and bumpy,” he said. “And much hinges heavily on how the negotiations proceed from here.
“But if Brexit uncertainty and its effects do continue to surprise on the downside – as we think they probably will – there is a decent chance that the UK economy, as well as interest rates and the pound, will do the opposite.”
However, Loynes said uncertainty could also intensify if talks proceed “particularly if they don’t go well”. The economist said it was possible that companies and households view Brexit as too distant to allow it to alter their behaviour currently.
Given the difficult with forecasting Brexit, some fund managers have simply chosen to ignore the negotiations, instead focusing on their own strategies.
“What I’ve been banking on more is that the companies I invest in are capable of being able to adapt and change to whatever is thrown by them by not being part of the single market or the EU,” he said.
Indeed, Steven Andrew, multi-asset fund manager at M&G Investments (pictured), said while it was “impossible not to talk about Brexit”, greater clarity on the main issues was needed.
He said: “For investors, dealing with such uncertainty means identifying the pertinent facts and assessing them in the context of asset price behaviour - what’s ‘priced-in’.
“In this respect, the important economic question on Brexit is not ‘what does the future trade agreement look like?’ The pertinent question is, ‘how different will it be from what we are used to?’ This is both an impossible and an easy question to answer.”
He said while exit from the EU had been backed by voters in the referendum, there had been no sign that they had abandoned the principles of open markets and that in answer to its pertinent question was unlikely to look that different from the status quo.
Andrew added: “Rather than take a strong view – and investment position – either way, contingent on a particular outcome, we should continue to look for opportunities where market price behaviour exhibits a strong ‘Brexit effect’.
“This way, we can seek to exploit the market’s craving for certainty while trying to resist our own, which is something I will be focusing on next year.”