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Brexit bargains

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

The people may have voted, but ironically it’s the very institution that the majority voted to leave, that is now calling the shots. In the never-ending saga of twists and turns that the EU referendum has put into play, the goal posts have been moved - once again. This time by Brussels.

Brexit bargains

Now, if MPs approve the UK Prime Minister’s withdrawal deal, EU leaders have agreed to extend the original 29 March deadline to 22 May. If they don’t approve it when Theresa May puts it to a vote, then the deadline shifts back to 12 April - at which point the UK must quickly set out its next steps - or leave without a deal.

That proverbial Brexit football, that Mrs May has been kicking down the road for a while now just took a sharp left boot from her European counterparts. Because in light of Mrs May’s refusal - or perhaps inability - to say what would happen if she failed to get her Brexit agreement through Parliament next week, EU leaders clearly decided to take control in an attempt to stave off a no-deal scenario.

But in doing that at least uncertainty just got a tad less uncertain, if you can put it like that. Because while the latest machinations will take time to digest, what’s emerging is that the threat of leaving the EU without a deal does appear to be receding. It would appear that none of the parties has a desire to see the UK leave the EU without a deal in place.

Of course, until it’s over we still face the prospect of a deal, no deal, a long extension or revocation of Article 50. But, all the signs from this side of the Channel and the other, is that a no-deal is not the preferred outcome.

And it is the threat of a no-deal Brexit, of course, that has rattled the currency markets, in particular, for so long. So much so that we have seen the pound being pushed and pulled as events have unfolded. And losses pared back whenever the prospect of crashing out without a deal appears to have been taken off the table. Friday morning was proof of that as the pound was on a much firmer footing, after having fallen as much as 1.5% in the previous session, following comments from French president Emmanuel Macron suggesting that Britain was set for a chaotic no-deal exit if Mrs May’s deal was rejected.

Conversely, it appears the UK stock market has largely turned a blind eye to the various comings and goings on Brexit. But there’s a good reason for that. Among FTSE 100 companies, few are truly British. Only just over a quarter of earnings going into FTSE 100 companies come from the UK. Some 22% derive their revenue from US markets, while Asia Pacific generates 21% and Europe 17%. Britain’s FTSE 100 index is really a proxy for the global economy.

But, as we know, where there are losers there are always winners and there could be some hidden gems lurking in the currently unloved, truly UK-focused parts of the UK stock market. As Fidelity’s Investment Director Tom Stevenson will be asking at next month’s Master Investor Show in London, the question for investors really is, is now the time to buy British?

The evidence suggests the answer is yes. Aside from the FTSE 100, which we have already established is a proxy for the global economy not a reflection of the UK’s financial, economic or political positioning, there are some potentially smart investments to be made.

While overseas investors have taken to giving UK plc a pretty wide berth, British shares have been under-performing their global counterparts. And that under-performance means British shares have become increasingly cheap. On the basis of the forward PE ratio (which measures share prices against expected earnings per share), the FTSE 100 is valued at an historically cheap 12.5 times earnings. And that, as Tom Stevenson will tell the audience, is similar to the market rating in 2003 after the implosion of the bubble.

If you take a look at another commonly-used measure, dividend yield, you see that the FTSE 100 index also appears to be offering an average income yield of 4.5%. That compares favourably with the coupon on a 10-year Gilt here in the UK, which is less than 2% and is far more attractive than the Bank of England’s base rate of 0.75% that it was slashed to in 2009.

If you fancy backing British then there are three UK-focused investments that are all also within our Select 50 range of preferred funds, which means they have been chosen because they have the edge over their peers, which are all worth a look.

They are:

Threadneedle UK Mid 250 which, as the name suggests, invests in a selection of medium-sized companies within the FTSE 250 index of UK shares. While I mentioned above that the FTSE 100 index is really a proxy for global companies, the FTSE 250 isn’t a pure representation of the UK either - with half of sales for these mid-cap companies generated overseas. But it is well placed to take advantage of the gains to be made from unloved and under-performing UK stocks.

Alex Wright’s Fidelity Special Situations, which is a more cyclical, value-focused fund that will do well if the economy picks up in a more stable post-Brexit environment.

Nick Train’s Lindsell Train UK Equity Fund, which is a quality-focused fund with a highly-concentrated portfolio of only around 25 shares. This is a more defensive play if you think that the economic headwinds will persist this year.

It may take a while for UK shares to brush off the Brexit effect, but as an investor in these British funds you’ll at least be compensated in the meantime with a healthy income.

Take advantage of the chance to lock-in those rewards by using your ISA and SIPP allowances before the current tax year ends, and you’ll be onto a double winner.

Best of British to you.

More ISA fund ideas
Master Investor Show
Select 50
Threadneedle UK Mid 250 Fund
Fidelity Special Situations Fund
Lindsell Train UK Equity Fund
Stocks and Shares ISA
Self-Invested Personal Pension (SIPP)


Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Select 50 is not a personal recommendation to buy or sell a fund. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.