Brexit scaremongering

I would like to share the following with you from Guy Foster of the highly regarded fund management house Brewin Dolphin.

Guy Foster, head of research at Brewin Dolphin, has argued the impact of June’s referendum on Britain’s membership of the EU has not been as negative for the UK market as many commentators have suggested.

In Foster’s view, Brexit is one of many issues affecting the stockmarket, and its impact is likely to be immaterial compared to other macro events, such as the slowdown in China, falls in mining stocks, deflation in Europe and Japan, and the lack of further rate rises in the US.

He said: “While we continue to believe the referendum will be a pivotal point for the UK economy, we suspect other factors will trump that for the UK market.”
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He points out the impact so far on government bonds has been positive, contrary to expectations, with yields on 10-year gilts dropping to their lowest average level in 18 months; while UK equities have rebounded from lows seen earlier in the year, boosted by weaker sterling.

“If I were being facetious, I would point out that the FTSE has risen by 9% since the note I wrote in February. Of course, that has happened for any number of other reasons though,” Foster (pictured) said.

Meanwhile, although sterling has fallen by 2.5% against the US dollar year to date, Foster attributes this drop to factors unrelated to the Brexit debate.

While we continue to believe the referendum will be a pivotal point for the UK economy, we suspect other factors will trump that for the UK market.

“The majority of the movement in the pound has been ascribed by many commentators to uncertainty over Brexit, while we would actually say most of it can be explained by movements in expected interest rates (or at least real interests rates),” he said.

He notes the pound has been weak against the euro and the yen, but so has the US dollar, which points to quantitative easing as the major factor supporting these two currencies.

Another impact of Brexit is the decline in capex among UK companies, but Foster said this has been happening since well before Prime Minister David Cameron announced plans to hold the referendum.

He said: “There is a sense of economic gloom among companies at the moment, which is more likely to be related to low inflation than concerns over Brexit.”

Foster also addressed the risk that the planned merger between the London Stock Exchange and Deutsche Boerse may not go ahead in the event of a Brexit, but noted: “Launching this transaction towards the end of February is indicative of companies’ willingness to embark on major projects in the face of material uncertainty.”

In conclusion, the head of research urged investors to consider other factors affecting markets, saying: “Do not believe the hype that Brexit is the sole factor determining every movement in markets and economies.

“Markets are complicated and investing is not about making knee-jerk reactions to single factors. Rather, it is a case of building a picture of the main factors which might cause a price or valuation to change, then positioning accordingly to take advantage of your insight.”

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