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Believe in the post-Brexit bounce

The markets have already taken a cliff-edge Brexit into account. The moment Brexit actually happens, they will rise

2 March 2019

9:00 AM

2 March 2019

9:00 AM

There will be some slightly heavy traffic on the M20. A Waitrose somewhere will run out of freshly cut Dutch-grown flowers. A couple of easyJet flights will get diverted, and there will be unconfirmed reports of an elderly couple from Winchester being evicted from their time-share apartment on the Algarve. Roll forward and the media will no doubt be on high-alert for ‘departure day’ chaos, with news crews stalking the airports and roadways, and Twitter in meltdown over every vague rumour of disruption caused by our exit from the European Union.

And yet, regardless of whether we leave with a deal or not, the truth is that Brexit is likely to be the dampest of damp squibs. By then, contingency plans will have been put in place to keep most transport systems running, and most of the other things the EU does we will gradually find we can quite easily live without. So how should investors respond to that? The closer we get to the cliff-edge, the more they should be buying British assets. Further, they should be focusing in particular on sectors such as property, defence and pharmaceuticals which should see the strongest bounce once we are finally out.

It remains, of course, to be seen whether we crash out of the EU with or without a deal on 29 March. Theresa May could yet manage to cobble together some amendments to her withdrawal agreement that gets it through parliament. The EU might agree to delay Article 50, there might be another referendum, or indeed a general election. We might decide to walk away and trade with Europe on World Trade Organization rules, or Martians might descend to provide some unexpected support for Chuka Umunna’s new political party — and we end up staying. OK, that last one is a little unlikely, but almost any of the other outcomes could still happen.

We have heard a lot in the past few years about how leaving the EU will be a catastrophe for the economy. Trade will seize up. The borders will be closed. Investment will shrivel, property prices will collapse and the City will be destroyed. There are variants of this, of course, depending on how far the rest of Europe is prepared to go to minimise the disruption, and you can argue about whether it is good or bad for the economy.


The important point is this, however: investors globally have largely bought into the scare stories. As soon as the result of the referendum came through in June 2016 they dumped sterling and every other asset with the word ‘British’ attached to it and haven’t found any convincing reason to return since. The most recent survey of global investor opinion by Bank of America Merrill Lynch found that Britain was the ‘most disliked’ region in the world, with a net 27 per cent of fund managers underweight on the country.

With every month that passes, they dislike us more and more. Money managers in New York or Tokyo would rather put their money into the latest crypto-currency launch than into the UK. That will turn around. In fact, there are three main reasons why as soon as we are out, British equities will embark on a sustained rally.

First, the doomsday scenario, with food and medical shortages and a wholesale evacuation of manufacturing, coupled with a currency collapse, has largely been priced in. The markets expect the UK economy to take a very big and nasty hit. If it turns out to be only a fairly modest hit, or even no hit at all, then prices will inevitably rebound. The British economy just needs to survive to beat expectations, and that is hardly a demanding target.

Next, the political chaos will start to ebb. It is not just Brexit itself that has scared off global investors. It is the banana republic antics around our departure, with ministerial resignations, threats of another referendum or a change of prime minister. Looming in the background is the menace of a hard-left Jeremy Corbyn government. No one wants to have their money tied up in a drizzlier version of Venezuela.

Once we are out, however, the UK will look a lot more stable. It will have a moderate centre-right government, ahead in the polls, and facing a split opposition. Compared with much of the rest of the world, Britain may look like a safe haven.

Finally, while there are unquestionably some losses from leaving the EU, once we are out, investors will focus on the upsides instead. Such as? The UK will almost certainly adopt a lighter touch to regulation than the rest of Europe, and it will have more competitive tax and labour rules. It is hard to quantify precisely the benefits of that, but that doesn’t mean they aren’t real. On top of which, with the public finances in decent shape, the Treasury will launch some form of stimulus. Both will boost growth.

So which sectors should investors focus on? The FTSE 100 should rise strongly, tempered only by a recovery in sterling, but small and mid-caps stocks should do even better. Anything related to the property market, especially in London, should bounce. Major export industries such as pharmaceuticals, defence and fashion will all do well. Retailers may get some relief if the acceleration in wages keeps going, as it probably will.

The UK market has been one of the worst performing in the world since we voted to leave the EU. Once we are out, it may well turn out to be one of the best — and there is still time to get in before it is too late.


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