A Brexit deal has passed the House of Commons: does this provide much needed certainty for UK businesses?
- Businesses have been saying for some time that all they need is certainty and a deal now has a parliamentary majority.
- If this provides some certainty, the response should be to buy cheap UK assets as quickly as possible.
- However, currency and equity markets’ response to the deal suggests that businesses don’t yet have what they need.
Is it possible to be optimistic about the prospects for a Brexit deal? Plenty have suggested that, in economic terms, it is worse than Theresa May’s deal and worse than remaining in the EU, but it is at least a deal and that is better than no deal at all. It even has a parliamentary majority.
Businesses have been saying for some time that all they need is certainty. It is not knowing the type of Brexit that is the most damaging for them. In other words, they could live with most scenarios, but not being able to plan is causing pain. Does this give them the certainty they need?
If it does, the response should be to buy cheap UK assets as quickly as possible. Mark Barnett, head of UK equities at Invesco, recently said that UK domestic companies are now trading at a 25% discount to their international peers. A pound of revenue generated in the UK is worth around one-third of that in the US. A bad outcome for the UK economy is certainly priced into the values of UK domestic stocks and anything less than awful could see some of these companies rally significantly.
The tentative response of Sterling suggests that markets aren’t yet sure that the bad outcome has been avoided. Sterling has rallied to $1.29 and €1.16 but has not responded to news of the deal. There has been a small outperformance by UK assets over the past month, but nothing that would suggest genuine optimism about the outcome.
The reality is that certainty remains some way off. Even if the deal is passed, the shape of future trading arrangements is not clear. All it does it give us two years to negotiate trade deals; these will presumably go to the wire, as all other negotiations have done, and businesses will face another cliff-edge as the deadline approaches.
While the logical response to an apparent improvement in the Brexit scenario would be to ‘buy British’, this deal no more ‘gets it done’ than the next deal or the one after that or the one after that. UK-focused companies and the UK economy will continue to face uncertainty. It may muddle through - it usually does. But those expecting an immediate revival in undervalued UK assets could be disappointed.
