A quick quiz to start

What does 2019 have in common with 1914 and 1939?

Hopefully not the obvious, (please President Trump and Kim Jong-Un!), or the introduction of ration books, but instead they were the last time the UK stockmarket was as cheap compared to UK Government Gilts.  This demonstrates the level of fear we have seen in the markets since the Brexit vote.

Now on the assumption that Jacob Rees-Mogg isn’t planning to galvanise his Dad’s Army and actually storm the tunnel I suspect there is a real chance we could see a significant rally in the UK market once we get some certainty as to our post-Brexit futures.

Now I know there is still a lot to be done before we can get there, and without getting too political it would have been stupid for the UK to go into the eleventh hour of negotiations, which as anyone who has been in this position knows is when the real nitty gritty gets done, without having the threat of a no deal on the table.  

It is only when there is a deadline and real jeopardy for both sides that pragmatism comes to the fore and I suspect this will be the case with the Brexit.  The truth is we are in a stronger negotiating position than listening to the media would have you believe. It is anticipated the Italian economy will have shrunk for the second quarter in a row when their GDP figures are published in a few days meaning that technically they are in recession.  Germany’s economy shrank in the third quarter of 2018 whilst the UK economy grew by 0.4%.

In fact in 2018 the UK economy grew faster than Germany, France and Italy, the three largest remaining members of the EU.  Not quite the scenario painted by economists when the vote to leave was announced, but one that means none of the European economies is in a position to absorb the damage a no deal Brexit would bring.

However this has not been reflected in the stockmarket where share prices in the UK have fallen at the same time as profits and dividends have increased, a scenario that defies logic and proves the market is being driven by the fear of the Brexit unknown rather than fundamentals.  Are these fears justified? Well certainly the reporting of the possibility of empty shelves in supermarkets and pharmacies does give one pause, but I suspect neither side of the Brexit deal wants, or is likely, to push the mutually assured destruction button of a no deal.

Although 2019 is not yet a month old we have already seen a bounce in some of the funds that have performed worst post Brexit vote, with the much maligned Woodford Equity Income Focus fund up nearly 8% compared to the All Share index which is up just under 4%.  (Source: Lipper 31/01/19) In fact looking at the league tables it is the funds that have performed worst since 2016 that have tended to be best in the short term.

What does this tell us?  Well firstly it looks to me as if the market believes if we do get some sort of workable deal a number of UK companies with a domestic bias will be in demand.  We have seen numerous managers in the last six months who have stated they have never seen as much value in the UK as there is at present and that companies were priced as if we were heading for Armageddon which I suppose the comparison with 1914 and 1939 demonstrates.

So what should an investor do?  Well I suggest you take most of the rhetoric being espoused by both sides with a pinch of salt.  Also, in my opinion, I do not believe now is the time to move your money out of the UK even though a lot of funds have have been negatively affected by the Brexit blues over the last couple of years.  Their day may well come sooner than you think.


Steve Forbes
Managing Director
Alan Steel Asset Management Ltd is authorised and regulated by the Financial Conduct Authority

The Financial Conduct Authority does not regulate tax advice

This letter is the personal view of Steve Forbes. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.