Yesterday’s defeat of a Brexit deal in the House of Commons may have been widely priced in by the markets but the real possibility of a ‘no deal’ exit from the EU will have lingering effects on the UK's economy and equity markets.
Speaking to Richard Penny, fund manager o f Crux’s UK Special Situations Fund ahead of the vote, he admitted to being rather ‘tense’.
His fund has performed well, it’s up 5.7 percent versus its benchmark’s return of 2.5 percent and Fundeye profiled it here.
However regarding the state of affairs at the moment Mr Penny says “we believe that most investors are as underweight the UK Stock market as they have been for some time.”
He cited National Audit Office figures which show that overseas investors have owned as much as 50 percent of the UK market as recently as 2015 (in value terms). These investors will of course worry about currency risk as well as market risk.
From a valuations viewpoint, the FTSE is trading at around an average 12-times forward price-to-earnings, a level it has been on for 30 percent of months since 1973. At this multiple investors can expect around a 20% return over five years.
However, Mr Penny adds rather ominously ‘some of the scenarios about the Brexit process involve a severe threat to UK economic profitability’ which would dent these historical average returns.
In an ideal world, Brexit goes smoothly and “the pounds strengthens , the economy strengthens and investors should be in a positive returns environment. The currency and the economy have uncertainty reduced and overseas investors come in off the side lines by buying the market” according to Mr Penny.
However, given yesterday’s severe rebuttal of Prime Minister Theresa May’s Brexit deal proposal, fears have been heightened. Many are worried that a Labour government could emerge as Labour leader Jeremy Corbyn has tabled a vote of no confidence which could lead to a general election. Mr Corbyn is viewed not business friendly according to a poll of UK executives conducted by London First in August last year.
Given the way Mr Penny’s fund is constructed, across different market caps and with key drivers of growth identified, it should continue to do well whatever the outcome of the Brexit saga. Its recent launch suggests that all possibilities have been considered and will produce returns even if the UK crashes out of the EU and currency weakness and UK economic weakness ensue.
