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May Dazed

Tom Stevenson

Tom Stevenson - Investment Director

Step by step, and amid unprecedented parliamentary drama, we are edging towards the Brexit end-game. The destination is still unclear, but it now seems that the path forward will be much better understood by the end of next week.

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Increasing clarity is starting to be reflected in financial markets where the pound reached a nine-month high yesterday and shares are holding onto the gains made so far in 2019. Investors are weighing up the probabilities of all the many outcomes that remain possible and concluding that the most economically damaging of these is becoming progressively less likely.

So, what is going on and why will the fog have lifted by next weekend? Most importantly, by Friday of next week, the EU will have staged a crucial summit at which it now seems almost certain that the Prime Minister will request an extension to the Article 50 process (the vote to mandate this happens later today) and the EU will have agreed to this request or not. Mrs May indicated in the Commons yesterday that such a request will follow, and be shaped by, yet one more ‘meaningful vote’ on her withdrawal agreement.

Her game plan is now much clearer. She is attempting to bounce the Eurosceptics in her party and the DUP into finally falling into line behind her withdrawal deal to get it over the line. She is doing this with an undisguised threat that failure to back her will leave her no option but to request a long extension of perhaps a year in order to rethink the UK’s negotiating position. That, in turn, she warns will raise the risk that Brexit is significantly softened or shelved altogether.

She has laid down the gauntlet in this way after another series of defeats in parliamentary votes that rejected (for the second time) her proposed withdrawal deal, on Tuesday, and then ruled out parliamentary support for a no-deal exit yesterday.

These developments do not make a disorderly exit at the end of this month impossible, but they do make it very much less likely.

The most significant moment this week was arguably not one of the various votes in parliament but a key part of the Chancellor’s Spring Statement on Wednesday lunchtime. This speech was significant not for any fiscal measures, or even the revised growth forecasts and public finances, but for the extraordinary sight of the Chancellor of the Exchequer standing next to the Prime Minister and effectively telling her that the time had come for her to change direction.

In his quiet, understated way, the Chancellor set the scene for a series of ‘indicative votes’ to find what parliament can support now that it has indicated what it cannot. It reminded me of Geoffrey Howe’s more-in-sorrow-than-anger attack on Margaret Thatcher nearly 30 years ago.

So, the likely outcomes are now these:

The first possibility is that the prime minister will succeed in finally corralling support for her deal over the next few days. She will squeak over the line next Tuesday or Wednesday and then go to Brussels to request a short extension to complete all the necessary legislation to leave the EU at the end of June. The difficult process of negotiating our future relationship with the EU will then begin in earnest (yes, I’m afraid this is just the start of it).

The second possible outcome is that parliament will step in to take control of the process, seeking to gain cross-party agreement on either a softer Brexit that includes membership of a customs union and perhaps the single market or moving towards a second referendum.

All of us will have views on which of these outcomes is preferable. From an investor’s point of view, however, both are probably better (economically) than Britain leaving the EU without a deal on March 29. The anguished business response to the publication of a set of no-deal tariffs yesterday underscored the potential damage of a cliff-edge departure.

So, how should we respond to this unfolding situation as investors?

The first point to make is that while this drama is dominating the headlines here in Britain, in most of the world it is just a bewildering curiosity. What they make of Speaker Bercow bellowing at the chamber is anyone’s guess.

Many overseas investors long ago gave up trying to understand what is going on in Westminster, concluding understandably that not investing in the UK would not make or break their careers. Taking a big bet on the US, or even an important sub-set of that market like the FAANG technology stocks, might matter; ignoring the FTSE 100 probably won’t.

So, it is important to put Brexit in context. What is happening in the US-China trade talks, or the direction of Federal Reserve monetary policy, or even the oil price is more important.

The second related point, however, is that the international indifference to the UK market has resulted in valuations that over the long run will probably reward investors. Investing at a historically low multiple of expected earnings and with an average dividend yield for FTSE 100 shares of 4.5% will probably deliver a decent return in the long term.

A well-diversified portfolio, probably with a higher than neutral weighting to the UK to reflect its valuation advantage, should stand investors in good stead through the ongoing political upheavals.

By all means let’s enjoy the drama in Westminster but we shouldn’t let it distract from a focus on our long-term investment goals. Nor, at this time of year, should it tempt us to ignore the use-it-or-lose-it ISA and SIPP allowances which expire in just three weeks’ time on 5 April.

Important information

The value of investments can go down as well as up so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not normally be possible until you reach age 55. This information is not a personal recommendation for any particular product, service or course of action. If you are in any doubt we recommend that you seek advice from an authorised financial adviser.