Corbyn Bigger Threat to UK Stocks than Brexit

The FTSE 100 should perform well no matter what Brexit deal we get, says Kleinwort Hambros. But a polarising Government would be harder to recover from

David Brenchley 15 November, 2018 | 8:17AM

Jeremy Corbyn, Theresa May, Labour Government, nationalisation, Brexit, Conservatives, no-deal Brexit

The FTSE 100 is set to outperform no matter what Brexit deal materialises, according to wealth manager Kleinwort Hambros - a far bigger risk to UK equities would be a change in political regime.

Speaking before Theresa May’s key cabinet meeting to discuss her exit deal, the firm stressed it was almost impossible to predict an outcome from the Brexit negotiations and position portfolios accordingly.

However, investors should take comfort in knowing geopolitical noise rarely has a lasting effect on financial markets, according to Fahad Kamal, Kleinwort's chief market strategist. “We tend not to really bother about geopolitics,” he says.

Kamal notes that over the past 110 years, we have seen two World Wars, several terrorist attacks and numerous other “extreme convulsions” and yet equity markets have marched higher regardless. “If you had bought equities in 1914, just before World War I had broken out, five years later you would still have been up,” he explains.

“More often than not, markets not only recover after most geopolitical crises, but they tend to do quite well. And what seemed like a crisis at the time turned out to be an excellent buying opportunity because sentiment was oversold in the short term.”

While the outcome is not easy to predict, despite the probability of a deal being agreed is increasing. And regardless of of the content of the Brexit agreement it is likely sterling will bear the brunt of investor sentiment.

The pound was hammered after the 2016 EU referendum. Equities were, too, but they soon recovered; the currency did not and continues to languish.

Kamal, remain positive on domestic stocks. “Our outlook on UK equities at the moment is neutral, but they are increasingly more attractive from a valuation perspective.” In fact, he says, UK equities are one of the few reasonably valued asset classes in the world right now.

Despite that, they are extremely oversold. However, “regardless of what happens with Brexit, they’re probably poised to do quite well”, thanks to the FTSE 100 bias towards big, multi-national business that derive a huge amount of their revenues in dollar terms.

“If there is a hard Brexit scenario and the pound is to fall, they will get a huge tailwind from that. On the other hand, if there’s a very positive Brexit scenario, they’ll probably just rise as a result of relief.”

Change of Government More Meaningful

Brexit is not the only spectre on the horizon. An election is currently four years away, but there is still a possibility an early vote will be called.

The future of UK shares hangs on which policy regime the UK has after we leave the EU, says John Birdwood, portfolio manager at Kleinwort.

He continues: “I think most British Governments would come to the view that in order to compete you have to deregulate and simplify the tax system, which is impenetrably complex.

“Jeremy Corbyn would probably take a different view. So, under his leadership cheap assets may well get cheaper; under whoever is the next Conservative Prime Minister cheap assets would probably get re-valued upwards.”

Politics around the world has become a big worry for financial markets. In Brazil, Mexico, Italy – even the US – ‘populist’ parties from either side of the spectrum are making gains at the expense of more centrist leaders that have dominated for so long.

That could soon be a problem in the UK, too, says Kamal. The emergence of a polarising government is a risk, he adds.

“If you look through the history of UK politics, most of the time, regardless of which party’s in power, they tend to be centre-left or centre-right.

“A change to somebody who’s quite left, or even quite right for that matter, as is happening all around the world due to inequality, would be a risk. It would be a dramatic change in paradigm, in terms of tax regimes, Government policy and growth.”

Investors would be best served taking a long-term view, history shows. It could be argued that if investors had known the outcome of the referendum in 2016, and the election of Donald Trump some months later, they would have missed considerable gains.

“You probably would have sold everything, converted it into gold and moved into a cave somewhere to protect yourself,” suggests Kamal. As it turns out, “2016 was an amazing year for investors and 2017 was even better”.

“Since we can’t predict what is going to happen, and since even if we could we’d have made the wrong decision anyway, it’s best to not do anything at all.

“Stick to your investment process and follow the signals that you know matter, which for us are valuation, momentum and sentiment.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk

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