I saw the election result in December, and I watched the stock market start to tick up in the following days. I really thought the period of cheap Brexit-depressed shares was coming to an end.
But then PM Boris Johnson launched his bombshell and committed us to a do-or-die trade negotiation timescale. If we don’t get a deal signed by the end of December 2020, we could be plunged into chaos after all.
In recent days our EU trading partners have been making it clear just how unrealistic the PM’s target might be.
Toughening stance
There have been two developments that I think should shake naive optimists out of any complacency.
French Foreign Minister Jean-Yves Le Drian has warned that he sees a tough battle between the EU and the UK in the upcoming trade negotiations. He’s suggested the two sides could be set to “rip each other apart” in the struggle. Perhaps unnecessarily, he went on to add that he thought getting a deal by the end of the year would be tough.
In another move, EU chief negotiator Michel Barnier has cast doubt on the UK’s plans. He appears to have scuppered the hopes of the UK’s chief negotiator, David Frost, who has called for a “Canada-Free Trade Agreement-type relationship.” Barnier reckons our “particular proximity” means things will have to be different. Oh, and just as a reminder, it took a full seven years to hammer out the Canada agreement.
Investment
The FTSE 100 has been showing the same pessimism. Since a post-election peak on 17 January, it’s fallen 3%. That might not seem a lot, but it means the index has gained only 5.5% over the past two years. And it’s a far cry from the bullish recovery I was expecting to see in early 2020.
Still, if the government hard line should dump us into recession in 2021, at least I reckon that could provide us with even better share buying opportunities. But you might ask, does it make sense to invest in UK shares at a time when the UK economy might be heading for recession?
Well, if you buy shares in UK-focused companies, maybe it is a bit of a risk. As an example, I have some Lloyds Banking Group shares, and Lloyds has refocused itself as a UK retail bank. I expect Lloyds shares to suffer in any economic downturn.
Global
But, even though all the companies in the FTSE 100 are registered in the UK, very few actually do much of their business here. Look at the biggest of all, Royal Dutch Shell. It’s a big international oil company, it generates cash worldwide, and it pays juicy dividends. Even if the UK economy completely disappeared from the world stage, Royal Dutch Shell’ profits should still be fine.
What about the next biggest ones? Unilever, Astrazeneca, HSBC… they’re all multinationals and largely immune to the British economy. But in the face of continuing Brexit uncertainty, I expect them all to remain weak. And in the event of a no-deal departure, I see them suffering along with the whole index.
Those are the kinds of stocks I think will offer continued, and even improving, buying opportunities.
