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What to look out for in December?

30 November 2018

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

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.

With its UK focus and large mortgage book, Lloyds Banking Group likely be a beneficiary, while housebuilders like Taylor Wimpey would also welcome an agreement.

Read our longer-term views on Lloyds and Taylor Wimpey.

But with a deal far from certain, it’s worth looking at what could happen if it is voted down.

Plan B

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.

Read the latest from our experts on the HL Brexit Hub

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.

However, the increasing popularity of Black Friday means there’s another big sales event in town. That adds extra spice to the retail results we are expecting, from Sports Direct and Dixons Carphone.

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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Lloyds Banking Group

Taylor Wimpey

HSBC

Royal Dutch Shell

GSK

AstraZeneca

Sports Direct

Dixons Carphone

The author holds shares in Lloyds Banking Group.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Investment notes
No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

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