UK shareholders saw investments falter as Prime Minister Theresa May today confirmed that we are leaving the single market. In a much-anticipated speech at Lancaster House in London this morning, May backed a hard Brexit which allows the UK to negotiate its own trade deals outside of the European Union.
“The British people voted for change and to embrace the world, believing it would lead to a brighter future for their children and grandchildren,” opened May. “I want this United Kingdom to emerge from this period of change stronger… a secure, prosperous and tolerant nation.”
May talked of building a “great, global trading nation”, and promised to work with and trade with European Union member countries – seeking a “new and equal partnership”.
The Prime Minister stressed that the UK was not seeking “partial, or associate membership – nothing that leaves the UK half in, half out”. She revealed that the UK would seek out a new free trade agreement with the UK, but stressed that this would not mean membership of the single market. Instead she said sought "access to the single market".
May also revealed that Britain would take back power to make its own laws, decided in Westminster rather than the European Court of Justice in Luxembourg.
The pound rallied prior to May’s speech, causing the FTSE 100 to fall in value, as the Office of National Statistics revealed UK inflation had risen to 1.6% in December, up from 1.2% the previous month.
What Next for the UK?
Alan Higgins, head of Portfolio Management at Coutts, said that we are now entering a transitional period.
“This is game theory – it is money versus control. We have money, and we want control – of immigration and trade. We don’t see a cliff edge situation; yes Nissan cars built in Sunderland will become 10% more expensive to export, but then so will German BMWs and they won’t want that. There is an equilibrium to strike.”
Despite May's clarification on single market membership, there are still plenty of Brexit unknowns, says Morningstar Investment Management CIO Dan Kemp.
“Theresa May is officially pushing forward with Hard-Brexit, strengthening her grip on the pro-Britain movement and sending the world into a state of obscurity,” said Kemp.
“This is causing many economists to speculate over fears of recession and the short-term state of the pound sterling. As such, we understand that many investors are reviewing their financial position with a closer eye than ever before.”
Why Sterling Will Rise in Value – Eventually
According to long term historical quantitative analysts by Applied Global Macro, sterling always reverts to mean value against the euro and the dollar. The timing, however is very, very, difficult to call, admits Higgins.
“A trade deficit is not a reason to hold the pound back; the UK and US have always had trade deficits, the UK had one when £1 was worth $2. We believe the pound will revert to mean value based on its current value, the understood political risk and our current economic strength,” he said.
Last year, a fall in the value of sterling caused the FTSE 100 index, where companies earn more than 70% of their revenues outside of the UK to reach an all-time high.
Speculating over Brexit and attempting to interpret every word Theresa May says is not the answer, warns Kemp; “It is a zero-sum game to guess the outcome of Brexit and then second-guess the way the market will react to that outcome. This is too difficult and has cost many investors throughout history.”
The better way to think about these high-risk events is to deconstruct the long-term returns of an asset and realistically attempt to understand the wide range of potential scenarios, he explained.
“This has its own challenges, but by applying a wide margin of safety an investor can navigate the noise and ensure the assets they own are valid long-term holdings,” said Kemp.
