What do fund managers think about the Brexit trade deal?

The deal has removed some uncertainty

“Our view is that the deal is better than a no-deal,” says Richard Colwell from Columbia Threadneedle, manager of the St. James’s Place Strategic Managed fund.

“Significantly, it removes uncertainty, which is a positive for the UK and enhances opportunity to grow trade with countries outside EU. For example, it is encouraging that Nissan immediately advised they would increase production in the UK just after the Brexit deal was announced.”

Since the referendum result in 2016, market commentators have pointed out that the uncertainty over the Brexit negotiations has been weighing on the share prices of UK companies. The fact that the road ahead is a little clearer might be part of the reason that some UK stocks have enjoyed a positive start to the year.

“We believe this is a good time to invest in UK equities”, adds Colwell, pointing out that UK stocks are still cheaper than some of their counterparts around the world.

There will be some friction

Although the trade deal eliminates a lot of uncertainty, there is still going to be some friction. However, managers believe the companies they invest in are well-placed to handle problems such as trade disruption.

“We never thought it was that material to Burgundy’s European portfolio, because we tend to own companies with sales diversified around the world that happen to be headquartered in Europe,” says Eric Goldstrand of Burgundy, co-managers of the St. James’s Greater European Progressive fund.

When selecting companies to invest in, fund managers weigh up the risks and opportunities they face. One such issue is supply chains: the networks of businesses, materials, and information that companies use to produce their goods or services.

Goldstrand adds: “Our companies tend to have production facilities and supply chains that are diversified across the regions they sell into. As such, we also have limited exposure to frictions from supply chains crossing borders, including the UK’s. We remain ready to add high quality UK companies to the portfolio when we think that their valuations make sense.”

While a certain amount of friction in trade is inevitable, the effect on portfolios can be lessened through careful management, adds Ken Hsia from Ninety One, co-manager of the Greater European Progressive fund.

“Some points of administrative friction have emerged as the new trading terms have come into effect, such as the rules-of-origin tariffs and border delays”, he adds.

“However, the portfolio’s exposure to these is limited; the vast majority of the fund’s UK-listed holdings are multinational companies with international manufacturing footprints, or providing services globally using local resources. Hence, they have a limited exposure to both cross-border trade flows between the UK and EU, and a limited reliance on domestic UK demand.”

COVID-19 is still the biggest issue

The pandemic, and the world’s response to it, is still the biggest driver of investment returns.

For example, markets dropped heavily in March when the pandemic took hold and countries around the world implemented lockdowns. They rebounded over the summer, in part thanks to large support packages from governments and central banks around the world. They were lifted further in November, when news about vaccine breakthroughs led to market optimism that the pandemic would soon be brought under control.

“In the short- term, the impact of Brexit will be dwarfed by the impact of COVID-19 restrictions,” says Richard Colwell.

COVID-19 is also making it harder to work out what effect Brexit has had. Lots of businesses are struggling with lower demand or disruption to their trading due to the pandemic, making it hard to pinpoint effects from Brexit.

“The impact of the deal being signed has been secondary to the impact of rising COVID-19 case levels across Europe, particularly in the UK. This makes disaggregating effects from the trade deal and impacts from COVID-19 difficult – we note, for example, that some logistics companies have pared back cross-border traffic but ascribe this to the pandemic,” adds Hsia.

There are still unknowns

Finally, although it has eliminated some of the largest sources of uncertainty, the future of UK-EU relations is still less clear than it would be if the UK was still in the European Union.

The impact of Brexit on financial services is one of the main issues that needs to be resolved.

“The financial services section in the agreement contains just eight articles, covering little of real substance,” notes Elizabeth Gillam, head of UK government relation and public policy at Invesco, a fund manager for St. James’s Place.

She adds: “It remains to be seen whether the two sides will remain aligned on major regulatory issues such as sustainable finance, financial stability and protections for retail investors.”

Of course, investing is about the long term. While it’s tempting to focus on short-term events in the market, what really matters is the long-term trajectory. The implications of the deal will be played out over years, and there will be bumps along the road.

We will continue to cover this topic as it develops this year.

Burgundy, Columbia Threadneedle, Invesco and Ninety One are fund managers for St. James’s Place. Where the views and opinions of our fund managers 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.