Theresa May survives amid Brexit chaos: what does it mean for your investments?
British Prime Minister Theresa May survived a vote of no confidence triggered by some of her own Conservative Party MPs, but she still has a Brexit deal she can’t currently pass through parliament. Amid all the uncertainty, and risk of a no-deal Brexit, the pound remains weak and volatile and UK-listed stocks are underperforming in global markets. IG portfolio manager, Oliver Smith, outlines his thoughts on investments for the next few months.
Prime Minister Theresa May is clinging on to her job thanks to support from her cabinet and those conservative colleagues who benefit from associated positions of power (Parliamentary Private Secretaries and the like). Nothing has really changed over the past month; the Conservative backbenches are still restless, and the EU Withdrawal Act must still be voted through Parliament if Britain is to leave the EU on the terms that May has tentatively agreed.
Making predictions is fraught with difficulty. Who would have thought that Gina Miller’s passionate campaign in 2017 for Parliament to have a ‘meaningful vote’ at the end of the negotiations would have the unintended consequence of giving power to a rump of ‘Brexiteers’, potentially blocking the ‘soft Brexit’ outcome that she – and May - wanted all along?
Politics will take a break over Christmas, but making unbalanced investment decisions will continue to offer a binary outcome between success and failure. The resumption of Brexit negotiations in January, on a tight timeline, leaves little time to unify Parliament and get concessions from the EU, which will result in market volatility.
Sterling looks good value and on the one hand might be a coiled spring, ready to rally, but on the other a -15% down leg could beckon in the event of a Corbyn-led minority government or a no-deal Brexit and capital flight. It is this juxtaposition that has determined the direction of UK equity markets over the past three months; the FTSE 250 has fallen -11%, while the FTSE 100 is down less than -5%.
Just as sterling looks cheap, the value in the FTSE 250 is clear, trading at a -25% price-to-earnings (P/E) ratio discount to the sixteen year average, and on a price to book discount (charted below) of -15%.
How is IG positioned?
Within our Smart Portfolios we have a nuanced approach, trying to balance the risks as finely as possible. In the short term our portfolios will not shoot the lights out, but nor do they bet the house on one outcome.
Exposure to bonds is positioned cautiously, meaning that if yields rise – either through rates rising, or a capital flight shock - then losses will be contained. In equities our UK exposure is limited to the internationally facing FTSE 100, which has a lot of foreign currency earnings. However, most of the equity allocation is invested overseas, particularly the US, where currency-hedged instruments are blended into our portfolios to restrict the amount of volatility that is caused by day-to-day forex movements. This means that if sterling does rally, while we may not hold the cheapest UK assets, your investments will largely be immune to currency translation losses.