Investors were prepared for a watershed week in Westminster and two days in it has not disappointed. The big question now is what the Brexit end-game might mean for our UK-focused investments.
First, though, a recap of where we are, with the caveat that things are changing so fast that this picture may soon be overtaken by events.
With MPs returning to Westminster, today and tomorrow look likely to be key days in the unfolding political drama. Here’s what we expect.
First, anti-no-deal politicians are expected to take control of the parliamentary agenda, attempting to push through a bill that will force the Prime Minister to request an extension to the Brexit timetable if he has failed to secure a withdrawal agreement by 19 October.
That is the day after a planned EU summit, which is essentially the last time that a deal can be struck for Britain to leave the EU in a planned, orderly way.
Anticipating this bid to derail the Government’s Brexit strategy, Boris Johnson took to the Downing Street lectern last night to clarify that he will not ask for an extension in any circumstances. This was widely understood to be a promise that he will call for a snap election if cornered by the so-called rebels in this way.
So, assuming that the anti-no-deal majority prevails today and tomorrow (not a given but the parliamentary arithmetic points that way), it is highly likely that the Prime Minister will lay down the election gauntlet by the end of Wednesday. Labour, having spent the last two years calling for a general election, will surely agree to it despite Tony Blair’s warning to Jeremy Corbyn that he is walking into an ‘elephant trap’.
The Prime Minister is adopting a high-risk strategy here. His primary hope is that by playing hardball on No Deal, he can neutralise the Brexit party and scoop up the 52% of people who voted to leave in 2016. He is counting on the opposition being effectively split between Labour and the Lib Dems.
His second gamble is that having won an election (probably to be held on 14 October) he will be able to go to the mid-October summit and demand a deal from the EU, which by then will be convinced that he means what he says about leaving at the end of the month come what may.
There are naturally many things that can happen to derail this course of events and the high level of uncertainty surrounding British politics is having its usual impact on UK assets, notably the pound. Sterling has fallen today to less than $1.20, its lowest level since 2017.
Interestingly, and worryingly, the FTSE 100 has today departed from the usual script by falling alongside the pound. Usually, weaker sterling boosts the value of our export and overseas earner-dominated benchmark index. Today, however, investors are voting with their feet, walking away from any exposure to the UK market.
Viewing the UK glass as half empty is understandable given the range of possible outcomes from this tumultuous week in Westminster.
On the one hand, a No Deal exit is rightly viewed as a very risky result. For one thing, it would merely be the start of a long and difficult period of uncertain negotiations. It would immediately introduce new trade frictions, further hitting already weak activity on both sides of the Channel. Businesses, which have been on an investment strike for the past three years, will most likely continue to sit on their hands. Consumers could retrench further than today’s retail sales figures suggest they already have.
On the other hand, an election victory for Labour would provide plenty of things for investors to worry about. Recent analysis by the FT and Clifford Chance, the law firm, points to the potential confiscation of £300bn of shares in 7,000 companies in a proposed handout to workers. A new ‘right to buy’ scheme for private tenants will ring alarm bells for buy to let investors. More generally, taxes are certain to rise under a Corbyn/McDonnell-led Labour government.
So, investors looking at their portfolios in the context of this week’s political developments will rightly be asking themselves how much of a weighting they should have to UK assets in their portfolio. The answer is probably less than many people will have. Home bias means that many UK-based investors will have more of an exposure than London’s 6% contribution to global market capitalisation would imply.
There are good reasons to think that much of the bad news has already been priced into a seriously out-of-favour UK market. The dividend yield on the FTSE 100 index of more than 4% is attractive in an environment of low interest rates. And the multiple of earnings on which British shares trade is much lower than on US shares, for example.
But with risk appetite on the wane across financial markets, there is little reason for investors to go out on a limb with regard to UK assets. An exposure to the UK still makes sense on valuation grounds but there is probably no hurry to add to it over the next couple of months.
For investors looking to protect their savings during this volatile and unpredictable period, broad diversification, across assets and between different geographies, has never looked more sensible.
Fidelity’s Select 50 Balanced Fund, managed by Ayesha Akbar, is a one-stop shop investment for nervous investors. Its underlying hunting ground is the Select 50 list of our favourite funds, which allows it to maintain a quality focus. By splitting its assets between shares and bonds, and by investing in all the world’s main regions, it also provides a high level of diversification.
Read more about the Fidelity Select 50 Balanced Fund.
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. Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. 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.
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