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Brexit: Should I avoid buying FTSE stocks?

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EU and UK flag on broken wall
Image source: Getty Images

The UK parliament has voted not to proceed with a no-deal Brexit which seems to ensure that the EU exit saga will drag on for much longer. My biggest takeaway from this vote and the previous vote, which rejected Theresa May’s deal, is that passing any deal through parliament seems impossible at the current time.

Deal or no-deal?

This news will be welcomed by Remainers who will now push for a second referendum with renewed vigour, despite Parliament so far voting one down. It certainly seems likely that there is nonetheless a majority in parliament who are opposed to Brexit in any form and a second vote is now a very real possibility. Whether you believe this would be wrong as it ignores a change that was voted for by a majority chunk of the electorate, or that it reflects the realities of a representative, rather than direct, democracy, the question here is, what does it mean for investors?

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The FTSE 100 and FTSE 250 have recovered slightly from the lows at the end of last year indicating that confidence is returning to the stock market. This could be because investors are prepared to accept that returns will continue in spite of the result of Brexit negotiations. Alternatively, it could be that remaining is becoming a more likely option. Despite this slight improvement for holders of FTSE companies, it still feels to me like the market is muted and the risk/reward ratio is skewed against investors.

Growing pains

My focus is centred around growth stocks and this category seems to be struggling more than most at the moment with companies needing to demonstrate strong growth just to maintain value. One example is Burford Capital, a law-focused investment management company, which released a stellar set of results yesterday. In a bull market I think these results would have seen a rise of at least 10%. However, after an initial rise yesterday, the price fell back to its previous value, still well below the highs of last year. Had these results been poor, the share price would have fallen significantly.

This presents investors with a problem, they are accepting mediocre returns in return for a high-risk investment. So what do I think they should do? There is another way of looking at the weakness of the FTSE and that is as a buying opportunity. A lot of companies’ valuations now look cheap in comparison to where they arguably should be, and that could change if there is a positive economic outcome to the ongoing Brexit negotiations. Nevertheless even the most optimistic among us will struggle to predict what that would be at this stage.

Don’t count on politicians

I’d certainly recommend caution when buying FTSE shares as the risk/reward ratio for investors is skewed unfavourably. However, if you’re looking to buy and hold for the long term, we may well look back at this period as a great time to buy a number of shares. Fortunately, the success of the stock market has always been because of the inventiveness of companies, not the competence of politicians. With this in mind, I’ll stick to the advice that “time in the market is more important than timing the market”.

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Robert Faulkner owns shares of Burford Capital Ltd. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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