Brexit two years on: ‘Crunch time’ for UK equities as uncertainty reigns

UK equities could face a ‘crunch’ moment as the Brexit deadline approaches but experts still regard the market as attractive overall, with the lag behind other major developed indices presenting opportunities.

Two years on from the Brexit vote in late June 2016, UK equities have enjoyed a near continuous move upwards, with the FTSE 100 up 23% since the vote, and the FTSE All Share up by the same amount.

Nonetheless, these returns lag other markets such as the US, where equities have moved ahead more sharply.

What comes next for UK equities? Investors have been jittery for some time and there remain concerns about the impact – in the near term at least – of the impending Brexit date on both UK equities and investor sentiment towards the UK.

Below, three experts give their views on what could come next for UK markets.

Adrian Lowcock, Investment director at Architas

“The recovery in commodity prices – in particular oil – has been one of the key drivers of the FTSE 100 since the Brexit vote, coupled with a weaker pound which has helped boost overseas earnings growth.

“Nonetheless, domestic UK equities still look cheap and attractive and that works well when you have a strong global economy – indeed that strength may have insulated the UK somewhat post the Brexit vote, as global confidence does feed through to UK companies

“Going forward, it becomes more difficult, and we are going to hit a crunch point. All may be pointing to a soft Brexit, but there is a risk that doesn’t happen, so while the UK looks more attractive than other markets like the US, it remains a possibility.

“In the near term, it means investors should consider diversifying away from the UK.”

Richard Philbin, Chief Investment Officer, Wellian Investment Solutions

“Ultimately we are dealing with very slow moving political entities with different agendas. Progress is therefore likely to move at a glacial pace – after all this isn’t the UK against Europe (or vice versa for that matter), this is the UK negotiating with the State of Europe as well as the 27 member states that make up the EU. One thing that can be said though is companies can (and do) move quicker than governments. Corporations can relocate, for instance, and change business plans.

“There will always be opportunity for industry and they will make the most of the challenges that lay ahead. But there will also be threats – for instance, if many companies relocate to Europe from the financial services profession, what could happen to property prices / rents in the City of London?

“Depending on a “strong” or “weak” Brexit, companies that have significant imports or exports will see their profits affected purely through translation effects of currency movement.”

Phil Haworth, deputy head of equities, Kames Capital

“After the initial shock of Brexit, UK equities have recovered their poise in the two years since the referendum and have been on an overall upwards trajectory since.

“That said, this should be viewed in the context of a bullish period for global equities and in fact, the UK market has notably lagged other developed market indices since mid-2016. The lack of clarity over what deal (if any) the UK will strike when it leaves the EU next year continues to weigh on sentiment for UK equities, despite the fact that operational performance of the underlying companies appears generally solid. Profit growth is strong and we are likely to see a year of double digit EPS growth, suggesting there are still plenty of opportunities to find successful businesses at attractive valuations.

“Until we know for sure what Brexit will actually look like, it is difficult to forecast what areas will be most impacted, either positively or negatively. However, at the top end of the market cap spectrum, the large, global companies which derive revenues from operations in many different jurisdictions are likely to be best equipped to handle the transition without having to radically rethink their business models.

“The prospects for these companies over the coming months are more likely to be tied to overall global equity performance and to depend on the supportive environment for global growth remaining intact.

“Until there is clarity on the detail of Brexit, there is likely to be some turbulence in UK stocks. Ultimately though, the UK will still have a large economy when we leave the EU and within that, there will be plenty of space for UK businesses to produce the goods and services that the population needs. Broad-brush generalisations about the prospects for sectors or styles can miss the point and being able to look through the noise to find strong, well-run businesses which can continue to grow and expand the market for their products, whether inside the EU or out, is key for equity investors.”