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  • Market Outlook

How Brexit could affect the markets

How Brexit could affect the markets

Usually, Christmas Eve television consists of children’s movies and game shows, but this year political news was front and centre. UK Prime Minister Boris Johnson appeared onscreen to tell the nation that, four years after the referendum, the UK had avoided a no-deal Brexit by sealing a last-minute free trade agreement with the EU, billed at £660bn annually.

“We’ve taken back control of every jot and tittle of our regulation,” he said at the time. “We will be able to set our own standards, to innovate in the way that we want, to originate new frameworks in the sectors in which this country leads the world from biosciences to financial services, artificial intelligence and beyond."

 

[BLOCKQUOTE["We will be able to set our own standards ... in the sectors in which this country leads the world from biosciences to financial services" - Boris Johnson, UK Prime Minister

 

The bulky agreement, which spans over 1,000 pages, includes the EU cutting the value of fish its fishermen catch in UK waters by 25%, new “level playing field” measures on issues such as workers’ rights and environmental regulations, and a 4- to 6-month transition period for data protection.

Retail, food and drink goods will be able to pass across borders tariff- and quota-free, but there could be an increase in delivery times given extra customs and safety checks. Airlines will be able to fly to Europe from the UK but can’t go between two destinations within the EU. Professional qualifications will not be recognised automatically in the EU, with people having to apply to individual countries for their qualifications to be accepted.

 

Agreeing equivalence

Missing from the deal were details on whether UK financial services firms will keep their passporting rights, enabling them to conduct business smoothly across EU countries.

This equivalence has been agreed temporarily on clearing but other areas such as shares, derivatives trading and investment advice still need to be ironed out in the months ahead. 

Reports note that the UK Treasury wants to seal a memorandum of understanding over financial services to the EU by the end of February. Despite the shortfalls and the continuing coronavirus crisis, the avoidance of a no-deal Brexit should provide a welcome boost to the UK economy. 

So, what does this mean for stocks and ETFs?

 

Brexit Stocks: What to watch

Russ Mould, investment director at AJ Bell, says multinationals such as Diageo [DGE.L] and Intertek [ITRK.L] are the “likeliest beneficiaries of frictionless, tariff-free trade” on the FTSE 100.

Manufacturers, such as BAE Systems [BA.L], Meggitt [MGGT.L], Rolls-Royce [RR.L] and Unilever [ULVR.L] may also benefit now that they “know where they stand in terms of trade flows, customs declarations and logistics”.

The laggards immediately following the deal were banks and providers of financial services, including asset managers and insurers. “This suggests that nerves remain over what deal will be struck in 2021 when it comes to financial services and indeed services overall, which provides a far greater percentage of UK GDP than fishing or manufacturing,” Mould says. 

 

"nerves remain over what deal will be struck in 2021 when it comes to financial services and indeed services overall" - Russ Mould, investment director at AJ Bell

 

However, there is hope that this will turn around in the months ahead, if an improved economy lifts the threats of rising bad debts and negative interest rates: “Banks […] still look cheap on a book value basis. They are still a geared way of playing any UK economic upturn in 2021,” Mould suggests.

Naeem Aslam, chief analyst at AvaTrade, agrees: “Yes, there will be business interruption but that is likely to be a lot less now as compared to a no-deal Brexit situation,” he told Yahoo Finance.

 

Positive outlook

Hopes that the calming of no-deal Brexit nerves will boost business and consumer sentiment and spending are also set to help UK housebuilders such as Barratt [BDEV.L], Persimmon [PSN.L] and Taylor Wimpey [TW.L]. “It makes perfect sense for investors to buy housebuilder stocks as they are still very cheap,” Aslam added.

 

"It makes perfect sense for investors to buy housebuilder stocks as they are still very cheap" - Naeem Aslam, AvaTrade chief analyst

 

Retailers like Next [NXT.L] and grocers such as Tesco [TSCO.L] may also benefit from more clarity on trade, supply chains, cost and consumer spending. 

Shares in Next climbed from 6,928p on 24 December to 7,468p on 5 January and Tesco rose from 232.9p to 238.2p.

Airlines like International Consolidated Airlines Group [IAG.L] and easyJet [EZJ.L] may also benefit, as people feel more optimistic and decide to jet abroad — even to the EU. 

UK-focused ETFs are also set to benefit from the Brexit deal. The Invesco CurrencyShares British Pound Sterling Trust [FXB] climbed from $130.84 on 24 December to $132.12 on 31 December, with the Franklin FTSE United Kingdom ETF [FLGB], which holds UK stocks such as HSBC [HSBA.L], Just Eat Takeaway [JET] and coronavirus vaccine provider AstraZeneca [AZN.L], steady at circa $22.

The iShares MSCI United Kingdom Small-Cap ETF [EWUS] is also tipped to do well from the agreement, with holdings including Rightmove [RMV.L], Electrocomponents [ECM.L] and engineering firm Weir Group [WEIR.L].

 

What to expect from European indices 

The German DAX is tipped to rise by 4% this year, with the FTSE also set to climb. There are signs that the British pound is strengthening — the dollar hit $1.37 against the pound early on 4 January, marking its highest level in three years.

This usually spells trouble for overseas stocks on the FTSE 100 who bank their profits in dollars, but overall the sentiment for the index in 2021 is positive. 

James McCombie, writing in The Motley Fool, sees a move into the 6,809 to 7,645 range from its present 6,639 level. “A no-deal Brexit has already been avoided, removing a big risk for the market,” he says. 

 

"A no-deal Brexit has already been avoided, removing a big risk for the market" - James McCombie, The Motley Fool

 

AJ Bell’s Mould believes the FTSE 100 could hit 7,500 by the end of the year. “The FTSE 100’s earnings mix means it is a good recovery play, in the event the COVID-19 vaccines do the business and global economic activity starts to pick up in 2021,” he says. “[However,] a persistent COVID-19 virus and a double-dip recession are both major threats to the recovery scenario… and the weighty influence of both oil and banking stocks could make some investors fight shy of the FTSE 100.”

Brexit may be done, then, but hurdles still lie ahead.

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