Five years on from the Brexit vote in June 2016, the UK has seen 3 prime ministers, a global health crisis, a divorce from the EU and unprecedented fiscal and monetary intervention which has impacted all asset classes. The pound which fell to a three-decade low post the vote has recovered, but still remains 6% lower than the day of the vote. The UK equity market has been a clear laggard over the period versus other developed markets led by the US, especially the tech heavy NASDAQ index. The pandemic has served to exacerbate market volatility resulting in a difficult landscape to navigate for investors, especially those focused on UK markets.
Brexit discount
The discount applied to the UK by investors has remained throughout the last 5 years and has led to a series of takeovers of UK listed companies including WS Atkins, Scapa, Horizon Discovery, Aggreko, Arrow Global and St Modwen Properties to name a few. The recent attempt by private equity to takeover Morrisons further supports the thesis that the UK market on its current valuation remains highly attractive to investors, especially private equity. The successful vaccination programme in the UK has been pivotal for investors looking at the UK with a very different lens, with a focus on the opportunities that are available in a high quality and well established market which has been unloved for the last 5 years.
Challenges and opportunities
The last 5 years have been challenging for UK fund managers who have had to deal with a bitter divorce with the EU and a pandemic, both events have led to heightened volatility and large changes in asset prices. The sectors that have struggled included Real Estate businesses with meaningful exposure to retail; these have had to weather the challenge from online disrupters and Energy where climate change concerns have come to the forefront. Telecom businesses are facing an environment where they cannot generate enough profits from customers to cover the eye watering costs for building out 5G infrastructure. The sectors that have held up relatively well and are positioned favourably to benefit post Brexit include Healthcare which covers a wide range of industries including pharmaceuticals, animal health and life sciences. The UK retains a leading position in high end industrial engineering serving customers globally. The Materials sector which covers construction and house building are also well set to deliver for investors, with the latter well placed to deliver on the long-standing supply shortfall of new homes in the UK. The high saving ratio which has been built up through the pandemic will unwind, when consumer spending rises once lockdown restrictions are fully lifted and those consumer facing businesses which have embraced digital will be in pole position to benefit.
The challenge for UK fund managers as we move into a post-Brexit world is how to position a portfolio at a market cap level. The small and mid-cap companies are in better position to take advantage of economic growth which is forecast to come through in the second half of 2021 and beyond. And it is no surprise that both the small and mid-cap indices are at a record high, whilst the FTSE 100 has failed to recover to its pre-pandemic high. The large cap index is dominated by more cyclical companies which have been out of favour for an extended period, although could be set for a change if we have a meaningful rise in inflation and a change in monetary policy. In addition, the volatility in Sterling has been a headwind for larger companies, with over 70% of revenues derived from abroad. For those investors who favour an active and quality approach to stock selection, there has never been a better period to build a focused UK portfolio.
Post-Brexit outlook
The unprecedented recent intervention by the Bank of England and the UK government coupled with optimism around the re-opening of the economy in the second half of the year and pent up demand from the consumer materialising augurs well for investors in the UK. The attractive valuations and higher dividend yields which are now coming through after a very tough 2020, which saw a flurry of cuts, deferrals, suspensions and cancellations of pay outs, will help to narrow the Brexit discount. In addition, the pandemic which has resulted in strong headwinds for the UK economy and markets will hopefully fade in time, allowing for normal activity to resume in 2022 and beyond. These factors paint a positive outlook for a market that has been long out of favour with global investors.
For more information on the EdenTree Responsible & Sustainable UK Equity Opportunities Fund, go to http://www.edentreeim.com/uk-equities
The views contained herein are not to be taken as advice or recommendation to buy or sell any investment or interest. The value of an investment and the income from it can fall as well as rise, you may not get back the amount originally invested. Past performance should not be seen as a guide to future performance. EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association. Firm Reference Number 527473.
Excerpt from:
Industry Voice: Brexit: the 5 year itch - Investment Week
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- Journalist Asks David Cameron Outright If Rwanda Bill Is A Consequence Of Brexit - HuffPost UK - April 24th, 2024 [April 24th, 2024]
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- The EU has finally admitted it needs Britain more than we need it - The Telegraph - April 24th, 2024 [April 24th, 2024]
- The Brexit revelations: May's no-deal, a Canada plan and mating porcupines - The Times - April 24th, 2024 [April 24th, 2024]
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- EU Approves Three-Year Delay to Post-Brexit Tariffs on EVs - OilPrice.com - December 22nd, 2023 [December 22nd, 2023]
- Travel chaos is 'only going to get worse' when new EU fingerprint checks come in - NationalWorld - December 22nd, 2023 [December 22nd, 2023]
- British exporters call on government to ease post-Brexit trade frictions with EU - The Guardian - December 22nd, 2023 [December 22nd, 2023]
- Brits visiting Europe will have to give fingerprints under new rules - Metro.co.uk - December 22nd, 2023 [December 22nd, 2023]
- Ursula von der Leyen humiliated as UK forced major EU climbdown in Brexit car victory - Express - December 22nd, 2023 [December 22nd, 2023]
- Modern slavery a feature of care sector in England since Brexit - The Guardian - December 22nd, 2023 [December 22nd, 2023]
- US president Joe Biden ditches trade deal talks with Britain over fears of job losses - The Independent - December 22nd, 2023 [December 22nd, 2023]
- Brexit inflation: The role of trade policy uncertainty in increasing UK import prices - CEPR - December 22nd, 2023 [December 22nd, 2023]
- UK and EU Reach Accord on Post-Brexit Electric Car Tariff Postponement - IndiaTimes - December 22nd, 2023 [December 22nd, 2023]
- How are Brexit travel restrictions easing outbound and inbound? - The Independent - December 22nd, 2023 [December 22nd, 2023]
- Jeremy Hunt to strike post-Brexit banking deal with Switzerland - Yahoo Finance UK - December 22nd, 2023 [December 22nd, 2023]
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- Post-Brexit EU clearing rules set for more relaxed approach - International Financing Review - November 8th, 2023 [November 8th, 2023]
- There's trouble in store for post-Brexit Britain - The New European - November 8th, 2023 [November 8th, 2023]
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- What's really behind GB News signing Boris as the voice of Brexit ... - Prospect Magazine - November 8th, 2023 [November 8th, 2023]
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- Bankers bonuses are back and the long 2010s dominated by Brexit ... - City A.M. - November 8th, 2023 [November 8th, 2023]
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- Mark Carney Has Delivered A Stunning Takedown Of Brexit And Liz Truss - Yahoo Movies UK - September 17th, 2023 [September 17th, 2023]
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- Britain's fishing industry in line for post-Brexit boost following the end of EU red tape - Daily Mail - July 19th, 2023 [July 19th, 2023]
- Tabloids are misleading their readers over Brexit at their own peril - The Media Leader - July 19th, 2023 [July 19th, 2023]
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