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The negotiations are rightly attracting lots of attention, but investors in UK companies should put the outcome into perspective.
Back in September this year, Apple temporarily became worth more than the entire FTSE 100 stock index1. After several months of strong share price growth, the US technology giant’s value soared past the $2 trillion mark, becoming the first US company ever to reach that height2.
The fact that a single company overtook the combined value of the UK’s top 100 companies has thrown light on the challenges facing UK equity markets. This is partly because fast-growing technology companies like Apple have thrived throughout the pandemic, performing better than the sorts of companies that make up the UK’s stock indices, which are more heavily weighted towards banks and energy companies.
Brexit has also played a role in holding back the UK stock market, because the lengthy negotiations with the EU have led investors to feel less certain about the UK’s long-term prospects. There should soon be more clarity on what the UK’s trading relationship with the EU will look like. But while the result is undoubtedly important, its impact for investors in the UK might not be as dramatic as some people think.
COVID-19 has overshadowed the talks’ impact
Firstly, the context of the COVID-19 pandemic is much more significant for investors. Britain’s GDP shrank by 20.4% in April after the first full month of lockdown3, and although recovery is underway, the economy will be battling the effects of the pandemic for some time. Rishi Sunak, the chancellor, this week argued that controlling national debt and spending is the government’s key task ahead.
The pandemic has already pushed many UK companies into withdrawing dividend payments. Large UK companies have traditionally paid high dividends relative to those in other countries. However, with many firms facing lower earnings this year, lots of them have postponed or reduced these payments, which has been challenging for overall investment returns.
The difference between a deal and no-deal may be smaller than it seems
By leaving the EU’s Single Market and Customs Union, the UK has already opted for a Brexit that is at the ‘harder’ end of the spectrum, points out Capital Economics.
“As the differences between a Brexit deal and a no-deal are not as big as they once were, the economic costs of a no-deal have diminished,” the firm argues. It estimates that a ‘cooperative no-deal’ between the UK and the EU would cause the pound to fall, inflation to rise, and for GDP in 2021 to be around 1.0% lower than if there were a deal. It adds that the Withdrawal Agreement has already laid down some terms for the separation, and that progress has been made on financial services equivalence.
The difference would be more striking in the event of an ‘uncooperative’ no-deal, the economists argue: “The bigger risk is that relations between the UK and the EU deteriorate to such an extent that both sides start to unravel the agreements already put in place”. If the talks do unravel acrimoniously, then there would be a greater hit to GDP, more inflation, and the pound would weaken more, they suggest. Arguably, the EU’s legal challenge to the UK over its Internal Market Bill has made this outcome slightly more likely than it was over the summer.
Long-term policy decisions also matter
The UK’s longer-term prospects beyond both COVID-19 and Brexit talks will be driven by policy decisions in the coming months, suggests Arnab Das from Invesco, which manages several funds for St. James’s Place.
“Freed from the guard rails of the EU’s regulatory framework in many areas, focus will shift to the Johnson government’s economic, financial, tax and industrial strategies as it returns to the ‘levelling up’ agenda – and above all, whether the UK’s traditional strength as an open, predictable, free market economy is enhanced or weakened.”
He adds that in the longer term, he “would expect the UK government to gradually find its way through fits and starts to decent policy choices, unlocking some of that value and restoring a bit of lift to growth.”
Ultimately, investors should remember that the overall risk of Brexit disruption is lower in a diversified portfolio, than if invested in the UK alone. Fund managers tend to invest across a range of regions, notes Gavin McGhee, a Wealth Management Consultant at St. James’s Place.
"A number of our fund managers say 'whilst we talk about Brexit in our interviews, when it comes to our investment decisions, when you look around the globe at international businesses, this is a bit of a sideshow' - it's something you need to be cognisant of, to be aware of, but it's not driving decisions."
Invesco is a fund manager for St. James's Place. Where the views and opinions of our fund managers or other third parties have been quoted these are not necessarily held by St. James's Place Wealth Management.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.
1Bloomberg, September 2020
2Bloomberg, August 2020
3Office for National Statistics, August 2020
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