So the UK and the EU have a deal, at last. As I have long anticipated, the potential damage to both sides from a ‘no deal’ – exacerbated by the ongoing impact of the pandemic and lockdowns – was too great to go down that road, and for all the inevitable bluster, threats and counter-threats along the way since Brexit, we have an eleventh hour agreement. Skinny, lightweight, the bare minimum required – one can anticipate the headlines – but a deal nevertheless. This has to be good news for investors in UK equities and, after a very trying year, perhaps the best Christmas present many could have hoped for.
That said, it was probably a consensus expectation among domestic investors that a deal would be reached, so reactions may be relatively muted compared to the reaction had one not been formed. That scenario would probably have seen significant further weakness in Sterling, sharp falls in domestically focused companies and resilience from multinational companies benefiting from the currency’s fall.
As it stands, there is a high likelihood the pound will appreciate, but in all probability only modestly. Relief, the avoidance of a bad outcome and the ability to look beyond this all-consuming negotiating deadline would then buoy sterling assets. Companies reliant on domestic economic activity – retailers, housebuilders, selected leisure and financial companies – should be the most direct beneficiaries. Whilst gains in multinationals will probably be more muted, given the currency headwinds, it is likely they will rise, in the hope that global investors will once more regard the UK stock market as ‘investable’ rather than a pariah of uncertainty.
But the recent sea change in sentiment towards ‘value’ stocks relative to ‘growth’ stocks, spurred by positive vaccine news, has seen some notable gains in many of these domestically oriented businesses already, which must to some extent limit the potential for further progress on ‘deal relief’.
Moreover, for the international observer, the UK economy has suffered a greater hit to economic activity than other European countries, more reliant as it is on consumption, services and leisure over manufacturing. The costs to the Exchequer of support during the pandemic have exacerbated the country’s ‘twin deficit’ problem, necessarily capping any rise in the pound. Political leadership in the UK during the coronavirus has not exactly outshone peers, to put it gently.
Global investors may well bide their time to see how the UK does indeed fare in its newly negotiated relationship with the EU before plunging back into UK equities. Any January scenes of lorry queues at British ports (of which we have of course already had a foretaste), reports of obstacles to the smooth passage of goods or an inability of supermarkets to source avocados – heaven forbid! – will only encourage such investors to stay their hand before rushing to take their underweight exposure to UK stocks back towards a neutral (or even overweight) position.
Non-UK companies looking to acquire UK assets may be rather quicker off the mark, however. Merger and acquisition activity has been picking up, and an end to ‘no deal’ uncertainty may well spur more international companies or private equity firms to press ahead with plans to acquire UK assets in a currency still cheap on ‘purchasing power parity’ yardsticks.
So, a deal is undoubtedly good news for investors in the UK. But reactions are likely to be modest rather than dramatic. I expect overseas flows into UK stocks are likely to build slowly over time. All too soon the focus will return to navigating this difficult virus-impacted winter, to partial lockdowns, rising unemployment and frustratingly slow progress towards mass vaccination and scalable testing. The UK finding its way out of the pandemic and its way in the world outside the EU will quickly fill the news pages emptied of stories about the trade negotiations.
Read more articles like this on our insights page
About the author
Richard Buxton, Head of Strategy, UK Alpha
Richard is Head of Strategy, UK Alpha in the UK All Cap team. Before joining Jupiter, Richard was Head of UK Equities at Merian Global Investors, where he was also CEO from 2015 to 2019. Prior to this, he was a fund manager at Schroders Investment Management before which he spent more than a decade at Baring Asset Management. Richard began his investment career at Brown Shipley Asset Management in 1985. He was awarded the Outstanding Contribution to the Industry honour at the Morningstar OBSR Awards in 2012.
Important Information: This document is intended for investment professionals and is not for the use or benefit of other persons, including retail investors, except in Hong Kong. Market and exchange rate movements may cause the value of investments to fall as well as rise, and you may get back less than originally invested. This document is for informational purposes only and is not investment advice. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued by Jupiter Asset Management Limited which is authorised and regulated by the Financial Conduct Authority, registered address is The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ.
For investors in Hong Kong: Issued by Jupiter Asset Management (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission. No part of this content may be reproduced in any manner without the prior permission of Jupiter Asset Management Limited. 26662
The information, materials or opinions contained on this website are for general information purposes only and are not intended to constitute legal or other professional advice and should not be relied on treated as a substitute for specific advice of any kind.
We make no warranties, representatives or undertakings about any of the content of this website (including without limitation any representations as to the quality, accuracy, completeness or fitness of any particular purpose of such content, or in relation to any content of articles provided by third parties and displayed on this website or any website referred to or accessed by hyperlinks through this website.
Although we make reasonable efforts to update the information on this site, we make no representation warranties or guarantees whether express or implied that the content on our site is accurate complete or up to date.
Our emails are designed to be topical and engaging, however if you don’t like what we send, you can unsubscribe at any time. We promise never to pass your details on to a third party.