Crux's Penny: FTSE 100 Could Bounce on Hard Brexit

A no-deal or hard Brexit may be bad for the UK economy, but it could mean a boost for the FTSE 100, according to Crux's Richard Penny

David Brenchley 13 September, 2018 | 1:34PM
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London Stock Exchange, FTSE 100, Brexit, hard Brexit, UK stocks

The FTSE 100 could again confound the naysayers and post gains in the event of a bad Brexit deal, according to Richard Penny at Crux Asset Management.

With almost £14 billion being withdrawn from funds in the Investment Association UK All Companies sector in the past 30 months, according to Morningstar Direct data, sentiment towards UK assets is currently at its lowest ebb for many years.

But, as is often pointed out, there are two opposing dynamics in the UK stock market. On the one hand, many companies – some banks, housebuilders and retailers – are very much exposed to the UK domestic economy. On the other, around half of the FTSE 350’s earnings are derived in US dollars or euros.

With uncertainty surrounding exactly what deal the UK will get once it leaves the European Union in March – indeed, whether it will get one at all – stock-picking is crucial.

Penny, who joined Crux from Legal & General back in June, says he is currently being cautious and focusing on two areas. Firstly, those firms that are least likely to be impacted by the deal the UK ends up with.

Of course, that’s easier said than done. “The one danger of that [strategy] is when we had the referendum vote and Mr Trump got in, some people predicted what was going to happen at those two events and then got their strategies wrong,” says Penny.

Defending Against Hard Brexit

The second area of focus would be to favour overseas earners over domestic names. The reason for this is, as seen in the aftermath of the Brexit vote two years ago, should the UK get a bad deal, sterling will plummet, meaning those overseas earners will get a currency-related boost to their earnings.

“The UK stock market isn’t the UK economy. If we had a bad, or so-called hard, Brexit, it’s probably bad for sterling … so it’s possible, strangely, that the UK stock market might go up.”

The fund also has the flexibility to invest up to 20% of the portfolio in companies listed on foreign exchanges, per Investment Assocation rules. Though, he notes: “Actually, if you think about British American Tobacco (BATS) or CRH (CRH), which are in the FTSE 100, they’re effectively American businesses anyway.”

Of course, in another scenario everything would fall – sterling, shares and house prices. Earnings could also be vulnerable, as management shun investing in their businesses until they get further certainty.

As a result, Penny says he’s steering clear of UK domestics and cyclicals, “unless there’s considerable distress in the share price”.

His comments come as Crux is launching a new UK Special Situations fund for the manager in October. The fund will be a concentrated portfolio of 40 best-idea UK stocks initially. While some may think it’s a strange time to launch such a product, Crux insists there are potential headwinds whenever you launch a new fund and says it’s not into trying to time the market.

Penny will aim to outperform the market over the longer term, like he did at L&G, and reckons there will, eventually, be plenty of opportunities in UK stocks across the board.

He currently sees plenty of opportunity in oil amd gas and mining services companies, which have had a tough time but are now recovering. But, over time, as Brexit uncertainty subsides, there are plenty of high-quality businesses in the retail and consumer space that may become attractive.

Penny continues: “If there are select retailers, say, that aren’t threatened by Amazon and the demise of the high street, and there is a refinancing at a very attractive price, I like to do that.”

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
British American Tobacco PLC2,556.00 GBX2.36Rating
CRH PLC6,142.00 GBX-1.19Rating

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David Brenchley

David Brenchley  is a Reporter for

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