Brexit 2020 - a revised look at the scenarios and ensuing prospects for UK equity markets

The tentative date for the United Kingdom breaking away from the European Union has been shifted to the end of January 2020, and with it also withered away a lot of uncertainties and confusions that had gripped the British businesses and the general public. The previous date of 31 October 2019 couldn’t take the two economic blocks apart, but it witnessed the extinguishment of many of the uncertainties and negative headwinds that were having a material bearing on the British economy, its businesses and its people at large. Ever since the Brexit mandate of 2016 till the 31 of October 2019, politico-economic climate of both United Kingdom and the European Union has been that of confusion and turmoil.

The constant verbal duet between legislators on both sides only did worse in deteriorating the sentiments of the general public. Again there was the confusion among legislators to agree upon a memorandum of an orderly withdrawal, otherwise known as a with-deal Brexit, as a consequence of which the British Parliament rejected three of such draft proposals leading to the resignation of erstwhile Prime Minister Theresa May. Finally, however, a draft brought in by current prime minister Boris Johnson seems to have found concurrence with the British legislators and hopefully this one will become the instrument of will of the British Parliament. All this and many more such events since June 2016 till October 2019 have taken a heavy toll on the sentiments of the general public with their confidence levels falling to record lows towards the end of October 2019. Finally, it seems all the confusion, all the disagreements and all the high decibel rhetoric have come to an end with little or no roadblocks on the path to a smooth passage for the event. The 31 January 2020 date has little to no irritants left to be ironed out and the markets have already started to take cue from it and have started to gain strength.

Boris Johnson , the current prime minister of Great Britain and an ardent proponent of United Kingdom’s  parting ways with the European Union, had got himself into a messy situation after the UK supreme court overruled his decision to terminate the parliamentary session prematurely, terming it as unlawful when he tried to scuffle an effort by the British parliament to push the eventual Brexit date beyond 31 October 2019. Johnson, who had been a frontrunner in the for-Brexit campaign, which saw success in June 2016 British referendum when the people of UK decided to vote for Brexit, had come to power by using Brexit as his trump card and had promised that the 31 October 2019 deadline will be met under any circumstances either with a deal or without a deal. However, as the due date came closer, the realization among the British public and the parliamentarians that a no-deal Brexit could spell disaster for the United Kingdom’s economy has prompted many to rethink his once populist slogan. Boris Johnson was certainly not taking the country in the right direction; this was the clear message when a number of key Members of Parliament from his party switched sides bringing the current government to the verge of collapse. With his poll promise now having fallen flat on his face, Johnson took the decision to take the country to polls again so as to get a clear mandate.

British General elections 2020

The general elections of 2020 are not going to be the same, unlike any of its previous two preceding elections. There is greater clarity among the people regarding Brexit, now we know that a with-deal Brexit is a certainty and the number of irritants that were preventing such a deal have been reduced significantly. So, the poll manifestos this time around will not be about with or without deal but will be about the contents of the draft agreements that Prime Minister Johnson has agreed to with the European union. This general election thus will be seeking a mandate from the British people to put an end to the uncertainty or continue with the turmoil by voting in favour of the sitting government or against it, respectively, while also deciding the fate of the incumbent prime minister Boris Johnson.

Brexit 2020 and beyond

Brexit, even in the currently proposed simplified form, will bring about large-scale disruptions in business activity in the two economic blocks. Over the past forty-five years deep business ties have been forged on both sides. British businesses have benefited from cheap labour arriving from other European countries which not only made them cost efficient but also helped them to expand their operations globally. The same can also be said about cheap, yet high quality raw materials that arrived in the United Kingdom. The worst to be affected by this event will be the banking industry which after the new customs and regulations involving people movement, will see a significant part of their operations curtailed.

Other than that, the European Union was also the biggest market for British goods and services. The British travel and tourism industry and the British education industry were the biggest export revenue earners of the sale of services from the United Kingdom. The British economy has for long been a recipient of high-quality manpower who came to work in the country because of relaxed visa restrictions among other reasons.

The event, however, is not all gloomy and also brings with it several opportunities which, if exploited well, will put the British economy is a stronger position than where it was prior to the event. The British legislature, in order to tackle the ensuing economic downturn, is expected to bring in radical reforms, which in the long run will strengthen the British economy. The British economy, in order to compensate for the loss of business from the European Union, will try to expand business activities with the rest of the world, which could very well open up new business avenues and business collaborations that previously could not have been envisaged. Other than that, when United Kingdom would go into forging business deals and collaborations with European member countries in individual capacity outside of the European Regulatory framework in a post-Brexit scenario, they could very well get better deals than they were getting while being a part of the Union.

The idea that European Union and United Kingdom will disassociate from one another entirely following the Brexit event is absurd and will only spell doom for the entire region if it so happens and which could be brought about squarely by its leaders. United Kingdom may not like the rules of engagement with the European Union economic block, but it will have to keep itself engaged individually with all its member countries under an arrangement of some kind, so that their shared interests are protected. The deep-rooted cultural connections of both these regions have been responsible for a healthy movement of people across the region. Restrictions of any kind will only make life difficult for movement of talented people. Sure, United Kingdom will benefit from expanding its economic and cultural ties with the rest of the world, but they could always have done that with or without Brexit.

British Equities in 2020 and beyond

The valuations of UK stocks look very attractive at this point. With LSE being on a three-year rally, is it the opportunity then that could create good value for investors entering the market at this juncture? UK equity markets have been under tremendous pressure lately due to the uncertain business environment and lack of policy clarity posed by the impending event of Brexit. It had exacerbated the sentiments among ordinary investors and high-profile fund managers alike, into putting on hold their investment decisions or look for investment opportunities elsewhere. A look at the valuations of most of the LSE listed stocks shows that they are at their lowest in a decade. Analysts though are not looking at individual stocks unfavourably but are generally un-enthusiastic on account of the clouds of Brexit looming large over the United Kingdom’s economy. The low valuations of UK stocks have been caused by a weaker Pound on account of the burden on the British exchequer to honour its dues of approximately £32.8 billion to the European Union on account of the divorce settlement, among other things.

Now, however, with most of the negative headwinds behind them and with some of the leading economic indicators looking up, British equities are definitely coming back into flavour. In fact, most of the investment banking and asset management firms world over are now considering the British equities to land the most potential gains in 2020. The British government and the British companies in the run up to Brexit (to take place on 31 October 2019) without a deal had made a lot of war preparations. Months of stock piling of tradable commodities and preservation of cash have made the balance sheets of companies in the United Kingdom strong and with the improved economic environment they have a strong launch pad to trade in the new year 2020. Secondly the British general elections will also certainly add more glitter, as the chances of the voters agreeing to the new draft for the deal are the highest. This will add to the confidence of the British people and businesses. Thirdly on the European Union side as well, a with-deal Brexit will entail a less disruptive business environment. The European block has also been on a war preparatory mode for quite some time.

On the monetary front as well a lot of preparations had been made. The Bank of England, The European Central bank and the central banks of several European countries have adopted a loose monetary policy with interest rates at all-time lows. Other than that the British government has announced several promotional measures targeted towards several industries in order to address the structural bottlenecks that have crept in due to the several months of economic and business turmoil. In Germany also the government has raised long term negative yielding bonds in order to finance its long term infrastructure, and France and other countries have also taken such long term measures to deal with any structural eventualities that may ensue out of Brexit.

On the specific sectors that would have been affected the most would be the banking sector. London is one of the major banking and finance hubs of the world. Brexit would bring about major disruptions in this industry, but with a deal in place much of the ill effects of Brexit that were being anticipated in a pre-31 October 2019 scenario, would have been ameliorated. Similarly, the travel and tourism industry that was set to be seriously impacted by a manpower crunch would now be less impacted as the draft deal contains provisions which would make people movement relatively easier. Similar will also be the case with manufacturing industries which were also going to affected shortage of quality manpower. The only impact, seemingly, will be in the material procurement and export-oriented businesses which can expect greater number of tariffs and regulations.

The most benefit, however, will accrue to the British equities from foreign institutional investors who had been sitting out for a long time on account of a lack of clarity as to what direction the situation in Europe might take. Now with the clouds of uncertainties clearing and the many of the blue-chip companies listed on the London Stock Exchange looking really cheap, a good flow of foreign institutional money can be reasonably expected. Most of the top equities donning the FTSE 100 have performed really well on the financial front last year and have even doled out record dividends despite the difficult business environment. Now with the environment relaxed more than ever, there is every reason that they will be surpassing their performances in 2020 and beyond, the same can also be said about the smaller companies as well despite the fact that the pre-Brexit jitters had a harsher effect on them than on the large-sized companies in that country.

The structural deficiency, however, of the worsened balance of payments situation on account of Britain’s payout to the European union will stay and it will be some time before the country is able to fully recover from it. On the global front also, the improving relations between the United States and China with regards to the trade war will also help build investor confidence and as a cascading effect will augment the prospects of the LSE-listed equities as well.