At the time of writing, Boris Johnson is struggling to get a Brexit deal in place and agreed by all parties before the landmark EU summit this week. Whatever happens at these meetings, there’s no denying the outcome will have a considerable impact on the UK stock market and other assets.
UK equities have already staged a tremendous rally off the back of the progress in the negotiations, and I believe that this will continue if a deal is agreed before the October 31st Brexit date. However, if the deadline is extended once again, or the EU refuses to give the UK an extension, then predicting the outlook for stocks becomes more difficult.
UK-focused assets will fare particularly badly without a deal. Analysts believe the value of the pound will slump in a no-deal scenario, pushing costs up for all UK consumers and manufacturers. With costs rising, consumers will spend less, and this will weigh on the earnings of all UK-focused companies.
An extension may give the same outcome. As we’ve seen over the past six-months, Brexit-related uncertainty isn’t doing the business community any favours. A whole range of businesses have announced this uncertainty is having an impact on sales. Meanwhile, managers are delaying investment in growth until they have more clarity on the UK’s future trading relationship with the EU and other countries.
The Bank of England has also said it’s likely it will reduce interest rates in the event of a no-deal Brexit. This could also happen if Brexit is delayed and the economy slows further. That will be bad news for savers and banks, which rely on high interest rates to make money.
Look outside the UK
If there’s any other outcome from the negotiations, apart from a deal in the next few days, in my opinion, the outlook is bleak for UK-focused assets. But there could be a handful of winners from a further delay or no deal.
Companies that earn the majority of their profits outside the UK have outperformed the rest of the market in recent years because they received an earnings boost, thanks to weak sterling. If the value of sterling continues to languish, compared to other currencies, I expect this trend to continue. We have also seen an increase in the number of overseas takeovers of British companies in recent years for the same reason.
So, how should investors react to this uncertainty? My advice is not to try to play the market, but invest in high-quality FTSE 100 companies that have a global revenue base.
FTSE 100 blue-chips
No matter what happens to the UK over the next few weeks or months, these companies should continue to produce steady returns for investors from their global diversification.
Companies like BHP are a great example. It has no exposure to the UK economy and has a history of returning vast amounts of cash to investors. Or, if you don’t want to pick individual stocks, buying a low-cost FTSE 100 tracker fund is another option.
More than 70% of the index’s profits come from outside the UK, so no matter what happens with Brexit over the next few days, the FTSE 100 should continue to produce steady returns for its investors over the next five, 10, or 20 years.
