George Salmon 30 November 2018
George Salmon, Equity Analyst
2018 has seen plenty of ups and downs in the UK stock market, but one news story has dominated the headlines: Brexit.
Now the EU has voted to accept Theresa May’s Brexit deal, the next step is the much anticipated vote in parliament. This will happen on 11 December.
So what could happen?
The deal looks like it’s going to have a rough ride in parliament. Infighting in the Tory party means there’s likely to be a significant number of MPs that vote against the deal while key government allies, the DUP, are also sceptical.
With the odds stacked against an agreement, a smooth passage would be a surprise. It would likely be seen as a positive for companies tied to the fortunes of the UK economy. That’s because it would remove lingering uncertainty over the potential for a no-deal scenario, something parties on all sides have been keen to avoid.
But with a deal far from certain, it’s worth looking at what could happen if it is voted down.
Firstly, the margin of defeat matters. A slim margin would leave the door ajar for renegotiation and fine tuning. However, if the Chequers plan gets chucked by a significant majority, that would be more disruptive.
There’s already talk of a vote of no confidence, or even a general election. It’s hard to see how those conversations would go away if the PM were to lose such a high profile vote by a large margin.
With time running out to get a deal done, the combination of political and economic uncertainty could heighten worries that the UK economy is headed for choppy waters.
But it’s not all bad news
While that sounds like bad news for the markets, it’s worth remembering many of the biggest companies in the UK don’t actually make much profit on these shores.
Take the top 5 companies in the FTSE 100 index for example. HSBC is a global bank with an Asian tilt. Shell and BP are much more concerned with the oil price than European politics, and pharmaceutical giants GSK and AstraZeneca sell the lion’s share of their drugs overseas. These five companies make up a shade under one third of the FTSE 100 index.
Rather than just being insulated from the impact, it’s possible these companies could get a currency-induced boost. That’s because if confidence in the UK economy falls, sterling would likely follow suit, boosting the value of international profits.
That’s what happened in the wake of the referendum result, back in 2016, but of course there are no guarantees we’ll see a repeat. As past performance is not a guide to the future.
So what does it mean for investors?
Frankly, it’s difficult to rule anything out in the short term, although our dedicated Brexit commentary will keep you up to date.
In the long run, second guessing political developments and their consequences should not form the backbone of any investment decision. Over time, you’re much better served focusing on long-term factors, and accepting there will be ups and downs along the way. All investments can rise and fall in value so you could get back less than you invest.
Away from Brexit, December isn’t the busiest of months on the UK markets. That’s typically because we don’t get the all-important Christmas trading updates until January, and full year numbers typically don’t start appearing until February.
Both have been struggling, but Sports Direct has been weighed down by the performance of its 29.7% stake in Debenhams. Last time out, this brought about a £85.4m write-down and this time it’s added to its Department store estate through the purchase of House of Fraser earlier this year.
Investors will be hoping the new strategy, which aims to position Sports Direct as the ‘Selfridges of sports retail’ and House of Fraser as the “Harrods of the high street”, can bring more positive news. Half year results are due on 13 December.
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The author holds shares in Lloyds Banking Group.
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