Brexit looming, uncertainty remains
13 Dec 2019
Ahmer Tirmizi , Investment Strategist

Polarising debates? Divisive politicians? Contentious policies? Alienated voters? Add your own or take your pick, but they all amount to the same thing. While some issues were decided last night, huge uncertainties remain.

Investors are faced with a dilemma. Instead of an anti-business Labour-led government with one pro-business policy, we have a business-friendly Conservative government with one big anti-business policy. The pound jumped around 2% overnight suggesting markets view the election as positive for the UK economy, but with it at $1.34 they still think resolution is far away.

However, it is easy to overthink UK politics. For starters, we live here. We look at our portfolios and see a number of lines with ‘UK’ in the title. In reality, though, 7IM runs globally diversified multi-asset portfolios. They are not especially vulnerable to UK politics. So investors should sit back, relax and wait … for nothing to change.

What do you need to know about the election?

The election had multiple sub-plots: would the Lib Dems threaten Conservative seats in the south east? How would remain voters tactically apply their vote? And who would suffer the ‘Portillo moment’?

But ultimately, only one plot mattered: the ‘Red Wall’. How successful the Conservative message of ‘Get Brexit Done’ would cut through to Labour’s traditional working class industrial heartlands ultimately decided this election. For instance, Workington, of ‘Workington Man’ fame, with a large Labour majority in the previous election, fell to the Tories by nearly 4,000 votes – the first time the Conservatives have ever won the seat after a century of Labour dominance.

What happens next?

We have a Conservative government with some business-friendly policies and one big anti-business policy – Brexit. Most likely, the UK will enter into a transition period once Parliament passes the withdrawal agreement next week. This will last until the end of 2020. If the UK can’t agree on a trade deal by the end of next year, it risks crashing out of the transition arrangements with a No Deal unless it requests an extension. Does that sound familiar?

Is the ‘oven-ready’ Brexit deal the one that Boris Johnson will decide to go with? With such a large majority, it may be possible for him to sideline the European Research Group (ERG), which is pushing for a hard Brexit, and go for something softer, more manageable and positive for the economy. This might explain why the pound jumped on the election news.

Meanwhile in Scotland …

The SNP (Scottish National Party) made big gains in Scotland, winning 48 seats. Its leader Nicola Sturgeon said the country had sent a “clear message” on a second independence referendum. This is likely to be an ongoing theme of the next few years, but we remain of the view that the financial implications either way are small.

What about portfolios?

  1. Global equities don’t care about the UK

    On paper, 7IM balanced portfolios have 17% in UK equities. In reality, most of these companies are listed in the UK but are active across the world. In sales terms the portfolios have a mere 4.5% exposure to the UK. This limits the impact of the UK’s future trading relationships on returns.

  2. Other growth assets don’t care about the UK

    It’s not just equities. Within fixed income we have higher-returning growth assets like global corporate bonds, high yield and emerging market debt. These will be fine. We also have UK corporate bonds which are 5% of balanced portfolios. But the top 10 issuers in the asset class include EDF, AT&T, Wells Fargo and Rabobank … these non-UK companies will continue to service their debts, even in a Hard Brexit world.

  3. Foreign currency can help out

    Bonds aren’t the only assets that do well when things turn ugly. Foreign currencies like the Japanese Yen and the US Dollar also tend to increase in value, as investors head for safe and stable nations.

    In specific situations such as Brexit, when the pound falls, it almost doesn’t matter where else in the world you go. On the night of the referendum in 2016 the Dollar and Yen were up more than 10% vs the Pound, but so were the Australian Dollar, the Brazilian Real and the Malaysian Ringgit.

    When it comes to the potential for crashing out next year or general UK uncertainty, our balanced portfolios are well protected, with around 30% in foreign currencies. If UK uncertainty ratchets up this is likely to weigh down on sterling but actually help portfolios.

This election feels meaningful. That’s how politicians win votes – by insisting that this is the election that really matters. In truth, Brexit-related economic uncertainty is set to continue, just in a different guise.

The Conservative win leaves plenty of questions open. How much power will the ERG have with such a large majority? Will the ‘oven-ready’ Brexit deal be changed? Will the transition period be extended? Or do we face another No Deal threat?

When it comes to portfolios, it’s best to not overthink the UK election. The idea of global multi-asset portfolios is to be diversified. They are not vulnerable to UK uncertainty. So while you may might worry about UK politics, you don’t have to worry about your 7IM portfolio.

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