The uncertainty surrounding the United Kingdom’s exit from the European Union has started to leave an impact. As a matter of fact, according to a 2019 Global Regulatory Outlook, issued by the United States’ consultancy firm Duff & Phelps, New York has overtaken London as the financial centre of the world. In 2018, 53 per cent of over 180 financial services professionals from 15 different countries chose London and 42 per cent chose New York. This time round, 21 per cent opted for London while 44 per cent stated New York.
An increase in volatility in the UK market could be expected following Theresa May’s announcement last week that she would resign on June 7. This has opened up the path for a new UK prime minister that will likely be a Brexiteer. Following the deadlock in the House of Commons over Brexit, the political landscape is in disarray, as Nigel Farage’s Brexit party beat both the Tories and Labour in the EU elections held last week. The Brexit issue has gripped the British society for almost three years now - an issue which has factioned the two main parties up to the point we are at today.
In light of his huge win in the EU elections, Farage has promised to challenge Britain’s political leadership in order to accelerate the country’s departure from the bloc. He has also confirmed that his party is getting ready for a general election.
Only until a few weeks ago, pound traders were pricing a soft Brexit which they were confident that Theresa May would eventually push through. The latest developments have turned everything round, as a hard Brexit is now more likely to happen. May’s resignation sent the pound tumbling and should May’s successor be Boris Johnson – a potential pursuer of a no deal strategy – the pound could stoop lower to the immediate post 2016 referendum levels. The currency is in fact expected to remain under pressure as long as the probability of a no deal Brexit remains high.
Charles Hepworth, investment director at asset manager GAM, predicts that the Pound will struggle all throughout summer due to this level of uncertainty.
Contrarily, the Financial Times Stock Exchange’s reaction to Theresa May’s resignation was minimal. The FTSE is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalisation. The minimal change is particularly due to the fact that 70 per cent of this is made up by international firms. The latter have in fact been more sensitive to developments in the US-China trade war. Furthermore, the weakening currency could have helped mitigate the negative impact on the large cap index.
Historical data shows that the best antidote against this unstable outlook is that of diversification between asset classes in different geographical regions
Some sectors in the FTSE are more susceptible to Brexit and domestic political changes. Equities of companies exposed to the UK economy such as UK domestic banks and retailers could be terribly hit by a no deal Brexit. In light of this fact, some of Theresa May’s potential successors are more inclined to attain a soft Brexit and, if necessary, may ask for a further extension to the current October 31 deadline, rather than waking up on November 1 out of the bloc – with the potential implications that this will bring along with it.
Jake Robbins, fund manager at Premier Asset Management, fears that UK’s economic growth will be badly hit in such circumstances coupled with the animosity coming from the US-China trade war. Mr Robbins fears that the hope of a compromise and an overall soft Brexit deal, such as a customs union, look less probable with May’s resignation. Despite the fact that the House of Commons rejected May’s deal on numerous occasions, it has so far been unable to agree on anything else. This suggests that the UK is doomed to remain clouded with uncertainty for some time to come. Investment decisions and business confidence are mostly hindered by uncertainty and thus, albeit GDP growth has held fairly well since the referendum, a possible hard Brexit could lead to worsening economic conditions.
Should the request for a new extension materialise, the question one must consider is whether the bloc is willing to agree to this. It is possible that this will depend on the purpose behind the request for the nth extension, whether it would be to hold a general election, a second referendum or another tactic to get the deal through.
The second half of 2018 was characterised by a slump in global investment markets. This was followed by a rally in the first four months of 2019 and a more recent downturn amidst increased tensions between the two world’s greatest economies. This, together with the UK’s planned exit from the EU, the tensions between the US and Iran and the renewed concerns over Italy’s growing deficit are resulting in heightened volatility which makes it difficult to forecast what may follow next.
Historical data shows that the best antidote against this unstable outlook is that of diversification between asset classes in different geographical regions. A limited level of diversification can be achieved by investing in specific holdings but optimal levels can only be achieved by investing in collective investment schemes which are professionally managed.
A portfolio made up of collective investment schemes and some direct holdings, both local and international, increases the possibility of experiencing overall positive total returns in the medium to longer term, despite the tumultuous global outlook.
This article was prepared by David Baldacchino, MSc Wealth Management (Edinburgh), B.Com (Hons) Banking and Finance (Melit.), DipFA, investment advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on 2122 4410 or e-mail david.baldacchino@jesmondmizzi.com.