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Brexit: investors watch and wait

Tom Stevenson

Tom Stevenson - Investment Director

Stock markets move on the unexpected. While the scale of the Government’s defeat in last night’s vote on Theresa May’s withdrawal agreement was unprecedented, it was also widely trailed. As a consequence, both the pound and the FTSE 100 have taken it in their stride.

Although the pound fell immediately as the numbers were announced in the House of Commons, it quickly recovered its poise as investors understood that the vote makes clear that there is no majority in parliament for a no-deal exit, considered to be the most economically risky of all the possible outcomes.

This morning, the stock market followed suit, with the FTSE 100 down but only marginally. At the time of writing, it stands 0.26% lower at 6,877.

The Prime Minister was humiliated by her parliamentary colleagues, including more than 100 from her own party who voted against the deal she struck five weeks ago with the EU. For investors, however, the dramatic events in parliament provided little new information.

This evening promises to be more important. That is because the vote of no-confidence called for by Labour and accepted by the Government will most likely end Labour’s pretence that it can win an early election and negotiate a better deal.

The Conservatives and their supporters in the DUP are certain to support the government rather than risk facilitating a Corbyn victory at the polls. Once the government’s position is secured, Labour will come under pressure to come off the fence and clarify its position on the various possible solutions to the current impasse.

Markets were also reassured by a conference call held after last night’s vote by the Chancellor, Philip Hammond, and other leading parliamentarians, with business leaders. For the first time, he raised the possibility of a delay to the implementation of Article 50, which in turn improves the odds of a softer Brexit, which might include membership of a customs union, or even continued membership of the EU, perhaps via a second referendum.

The relatively sanguine response of the market underlines the importance for investors of standing back from the political noise and focusing on their long-term financial goals. Whatever is likely to happen over the coming days and weeks is very likely to have already been priced in. If it has not, it is by definition unpredictable.

The second key lesson from this week’s political drama is the importance of maintaining a well-diversified portfolio. There is a danger that UK-based investors become transfixed by the rolling news coverage of events in Westminster and forget that the UK stock market is only a relatively small part of the global whole. A portfolio spread across different asset classes and geographical regions should not be unduly concerned by events in Britain.

A third point to take from the current situation is that uncertainty creates opportunity. Because investors are unsure about how things will turn out in the UK, they have tended to look elsewhere in recent months. This has resulted in significantly lower valuations in the London market both compared with history and versus other markets. In the recently launched January Investment Outlook, my view on the UK stock market was changed from neutral to positive on valuation grounds, with the 4.6% yield on the FTSE 100, in particular, looking attractive.

Without a doubt, history is being made this week in Britain. The future of our trading relationship with Europe is uncertain. You could go further and say that the way we view ourselves as a country, and how others view us, is up for grabs. That is unsettling and exciting, but it is probably less significant than we might think as far as our investments are concerned.

This is a good time for investors to keep calm and carry on.

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. 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.