The past couple of years since the UK public’s vote to leave the European Union has been a trying and confusing time for British politics. In the past 24 hours we have finally seen the substance of the deal behind the agreement reached between Prime Minister Theresa May’s negotiating team and those representing the EU27.
The publication of the proposed deal has taken UK politics from a period of uncertainty to arguably its most chaotic in peace time. How should investors react, is now a time to panic? James Klempster (CFA) Head of Investment Management of Momentum Global Investment Management, one of our UK regulated, discretionary fund managers shares their view.
The proposed deal would always have to be a compromise, and some political skirmishes were to be expected, but the final deal offered up to MPs today seems to be a disappointment to seemingly most if not all political persuasions. It is clear the deal did not satisfy even a significant number of members of Theresa May’s own cabinet and Dominic Raab, the man whose role was to negotiate the exit deal, has provided the most notable resignation over the deal thus far. There could well be more and the PM’s imperilled position has not been aided by Jacob Rees Mogg’s submission of a no confidence letter in his party leader and the apparent loss of support from the DUP. Despite the widespread criticism of the deal the PM has made it clear that she intends to go through with its approval by the EU27, scheduled for a summit on November 25th, followed by Parliamentary approval in December.
The deepened uncertainty has seen sterling come under pressure (falling over 2% vs USD at the time of writing) which has helped the UK’s companies that have significant foreign revenues but domestically focused counters are coming under pressure. Politics is renowned for being difficult to predict and today’s events serve as a salutary reminder to us all that making thematic investments on the basis of a particular political thesis is a very dangerous game.
As the situation in UK politics is very fluid presently it is impossible to say with any certainty what is likely to happen next. What we do know is that the Tory party is bitterly divided and in disarray and that Theresa May’s position is quickly looking untenable. Indeed the odds of Jeremy Corbyn becoming the UK’s next PM have been slashed representing an arguably greater risk to the prospects for UK businesses than Brexit itself.
Momentum Global Investment Management have maintained since the early stages of the negotiation with the EU that a compromise deal would only be reached at the 11th hour. It is still possible that this deal (which presumably will be accepted by the EU because it was in essence created with them) may still squeeze through Parliament but there is a substantial chance that it doesn’t. Should it fail to make it through the Commons we would be facing the likely prospect of leadership battles both for the Tory party and potentially for the country and this scenario leaves us with the real chance of having no deal in place by March 2019. Unless the EU agreed to an extension of the notice period, that would mean an immediate exit from the EU with no transition period, the no deal scenario that has most worried investors and business.
We do not believe that now is a time to panic. We have maintained through the past couple of years that the UK stock market in particular is home to a global roster of first rate companies that happen to be listed in the UK. This has not changed overnight, nor has the role of the management of these firms; namely to make profits for shareholders regardless of the prevailing political winds.
The next few days and weeks could be tumultuous and confusing for investors in the UK but we firmly believe that periods of market stress such as this provide opportunities to longer term investors. As a result, while politics could provide a cacophony in the background investors should keep focused on the outcome that they invested for and understand that well diversified portfolios of assets provide a degree of diversification that should shield investors from the worst of short term market moves while providing the opportunity of participating in upside once the worst of the bad news has subsided.