Ahead of a pivotal weekend for the whole country, Helal Miah, Investment Research Analyst at The Share Centre, explains what it means for investors.
What could the new Brexit deal mean for the markets?
It’s a pivotal weekend for the whole country, especially in Parliament and the markets. Market traders and investors today will be mindful of the positions they take into the weekend, the potentially large moves that are expected late on Sunday night when the currency market opens again and early Monday morning when the stock market reopens. When Boris Johnson took over, many did not give him a chance of persuading the EU to budge and come up with a new offer, but with the Ben act, his options were limited and he has pushed hard very late into the day to put a new deal forward for Parliament to decide upon.
During this period we have seen some substantial moves in the market. Sterling has strengthened materially, now hovering close to $1.29, just over 5% up from $1.22 a just over week ago as the prospect of a deal could finally put all the uncertainties to bed meaning businesses could forward plan and invest for the future, and avoiding the disastrous No Deal.
When looking at the FTSE 100 index, it has not changed much over this period, but this masks what has actually been going on amongst the constituents. Since the 9 October, housebuilders have surged, Persimmon is up roughly 20%, Taylor Wimpey 16%, Berkeley 16% and Barratt 11% -- all of whom are highly dependent on UK consumer confidence. Likewise the big UK banks (RBS up 26%, Lloyds up 20% and Barclays up 17%) and insurance companies are all higher by double digits percentage growth figures. Most other UK exposed companies and sectors have had a strong rally but the actual index moves have been held back by the giant multinationals, who aren’t really that impacted by Brexit.
The big oil companies Royal Dutch Shell and BP, the pharmaceuticals GSK and AstraZeneca, and other multinationals such as Diageo and Compass are all down between 2-6% over this period. Yes, smaller percentage falls than those that have risen, but the multinationals sheer size and weightings within the index have a larger impact in the index itself, leaving it relatively flat overall.
The FTSE 250 gives a better reflection of the sentiment in UK based companies, and the mid-cap index over this same period is up by just under 6%. It’s here where we are likely to see the biggest reaction on Monday morning. As it stands, we see the market placing slightly less than a 50% chance of the deal being approved. Under this scenario, I can envisage Sterling easily breaching above $1.30, and possibly $1.31 again, with the FTSE 250 responding well and following on with the moves over the last week and adding another 4-5% to its value. Meanwhile the FTSE 100 is likely to be a little more muted up 0-1%.
However, at this moment in time, we see more chance of the deal being rejected, and in this scenario we expect some unwinding of Sterling’s gains, possibly dropping below $1.25 again with the FTSE 250 giving up the week’s gains and losing around 5-6%. The bigger FTSE 100’s moves are again likely to be muted.
While this is the very short term picture we are considering here, it could present opportunities and risks. At The Share Centre we always take the view that personal investors should take the longer term view and so long as an individual’s portfolio is well structured we do not believe that any rash changes to their portfolio should be made today. Under all these scenarios, we still view that equities are a good place for money to be placed for good long term returns.