The Week: Deal or no deal, the UK’s unpopularity could continue

The UK market is hugely out of favour, but some resolution to the Brexit situation – be that deal or no deal – see UK assets find favour once again?

  • Even a ‘no deal’ scenario would bring some clarity for British businesses
  • However, businesses are still struggling to plan in the face of insufficient official information
  • UK assets may not bounce back just because we have clarity on the type of Brexit we face

The UK appears to be careering towards a no-deal Brexit. Talks are going to the wire, but the verdict from both sides appears to be that the areas of disagreement are too profound and fundamental to reach consensus. Some have argued that any outcome will revive the beleaguered UK stock market – once there is certainty, international investors will return. Could this be true?

Certainly, the removal of uncertainty is a bonus of sorts for UK businesses. The Government has been exhorting them to prepare for Brexit, but until this point very few knew what Brexit would mean. Without knowing the terms of trade, including tariffs, VAT arrangements or border checks, it was very difficult to adjust their supply chains in preparation. Now they know they will be operating under WTO rules, they can plan.

However, let’s not pretend that this will necessarily bring clarity. The latest analysis by the British Chambers of Commerce shows that businesses still have insufficient official information available in 24 critical areas. Its ‘Brexit Guidance Dashboard' –still has 24 of 35 key questions flashing ‘Amber’ or ‘Red’ as at 7 December. It’s not going to be party time for British businesses even when they understand the terms under which they’re trading.

Equally, the idea that there will not be short-term economic hardship seems at best naïve. Higher tariffs are likely to bring inflation in a number of key areas, leaving the British consumer with less in their pocket at a time when the Covid-19 outbreak has already proved highly disruptive to household finances. While many may applaud the political aims of Brexit, it was always likely to come with an economic cost.

That said, this is all known and understood by investors and as such, it is largely reflected in the price of UK assets. A recent study showed UK shares trading on a 50-year discount to the rest of the world. Money has bled from UK markets in recent years and it would only take the smallest change of heart towards UK companies to make a significant difference in performance. There has already been some limited revival in the wake of vaccine news.

However, the same could have been said for sterling and it has still sold off as a ‘no deal’ has become increasingly likely. While the UK may be cheap, there still appears to be considerable disruption ahead and international investors have no reason to give the UK the benefit of the doubt. Could the UK market revive on a no deal? It looks far from assured.