So, what’s next?
At the time of writing we were about to face a vote by MPs that will determine whether or not the UK wants to leave the EU with no deal in place. If the motion fails, as it is expected to, another vote will be held today on whether to extend Article 50. If MPs vote to extend Article 50, Theresa May will have to go to Brussels and ask the EU for an extension to avoid crashing out of the common market on 29 March.
All of this will likely happen between the moment I put the last full stop on this article and when you open your inbox and read this email. Suffice it to say, this Brexit story has a lot of moving parts.
Currently, the consensus seems to be the EU will however allow the extension, albeit with some caveats. I will not be speculating on what those caveats could potentially be as, when it comes to policy makers these days, it is pretty much anyone’s guess.
But I am assuming, which is a big assumption, that the UK does the sensible thing and requests the extension, which will stave off the almost certain disaster of a messy “hard exit” at the end of the month.
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So, why am I telling you this?
Because there is an old saying in financial markets: “The time to buy is when there’s blood in the streets.”
This adage ironically was attributed to a British nobleman Baron Rothschild, of the Rothschild banking family. And looking at the returns on the UK market, there might not be blood in the streets just yet, but Brexit fear has certainly helped UK markets to significantly lag their US counterparts.
In a nutshell, plenty of risk aversion is helping to suppress UK stock prices.
Just looking at UK markets this year, there was a short rally on the London Stock Exchange in January as optimism grew over a possible deal. But as we got closer to 29 March deadline, this bullish momentum withered, and prices have come down nicely.
Now sure, I accept there is a possibility of a “no deal” Brexit but it’s also easy to forget, with the negative headlines dominating the press, the UK is still the worlds 6th largest economy. And, for now, is still home to one of the world’s largest financial hubs.
Also consider the London Stock Exchange is still one of the worlds largest stock exchanges by market capitalisation. As a global investor, that is a dangerous animal to ignore.
My thesis: As we approach the end-game for Brexit, a geo-political anomaly that has trundled on for two-and-a-half years now, I want to buy into the UK markets. But I want to be buying at the point of peak uncertainty.
How am I going to time it?
According to ING, the Dutch banking and services provider, the duration of an Article 50 extension is key to figuring out the potential economic and financial market impact.
This is because a shorter extension will keep the risk of a no deal Brexit alive. On the other hand, financial markets seem to be assuming the longer this “divorce settlement” is stretched out the more chance there is of a reconciliation or some sort of amicable parting.
Many dealers on our desk believe a second referendum is now a real possibility!
So how do you play this one?
Scenario #1: Short-term extension to Article 50
If all my assumptions above are correct and we get the Article 50 extension, there might be an initial rally, but it is expected to be a short-lived. Once investors start to realise no deal Brexit is back on the cards, and a very real possibility, markets will likely take a dive. A short-term extension would be around 2 to 3 months.
In this case, I want to sit on the side lines for now, watch the mayhem play out and re-assess closer to the date.
Action: Hold for now…
Scenario #2: Long-term extension
If we get a longer extension, which I would say is an extension of 9 to 12 months, UK markets should start moving higher. Here I want to jump into the UK markets as quickly as possible.
A longer-term extension could also increase consumer spending as the threat of a “no deal Brexit” fades into the background. Consumers will feel more relaxed and begin to loosen the purse strings. Businesses might also become more confident allocate more funds to hiring and spending.
I believe a 12-month stay of execution will also likely give the opposing sides enough room to sort out some of their issues. This will mean buying quickly but also that you’ll have access to one of the world’s best markets at a time when sentiment had forced prices into the bargain basement.
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Action: Fill your boots! Buy, buy, BUY!
Scenario #3: Hard Brexit
Of course, we cannot ignore the looming spectre of the UK crashing out of the EU on 29 March with no deal. The “Hard Brexit” scenario will be an unmitigated disaster.
In this case, I would say avoid for now. There could still be plenty of downside to markets if this plays out. The time for buying will come but we’ll seriously need to reconsider this developed market as an investment proposition.
Again, the situation is very fluid to say the least. I must reiterate by the time you’re reading this the landscape will have changed. But that doesn’t change the fact that there are bargains to be had for those investors with the guts to get in.
When everyone is telling you to zig you should be zagging. Right now, UK markets are radioactive but I’ll leave you with another contrarian quote, this time from legendary investor Warren Buffett: “You pay a very high price in the stock market for a cheery consensus.”
If you’re interested in finding out more on practical ways to trade the Brexit, feel free to contact me on firstname.lastname@example.org
Personally, I’m building a fully managed long-term equity portfolio in the UK to express my views. But if there are plenty of other ways to access UK markets from SA. Everything from short-term derivative contracts, to specialist structured products to good old fashion dual listed ordinary stock.
Rand Swiss, Wealth Manager