Brexit Or No-Brexit - What Is The Deal For Equities?

The year 2019 holds massive significance as the United Kingdom possibly withdraws from the European Union. Brexit will have turbulent repercussions in all areas whether the deal occurs with or without a firm replacement to cooperate closely through regulatory and economic understanding. March 29 is going to be a pivotal point in the history of UK economy as well as the rest of the world.

Despite the uncertainty ahead, some useful observations showcase resilience of the UK stock market in 2018 amidst the geo-political turmoil and economic volatility. The year astonishingly witnessed above 20 international companies to list in London and raising GBP3.2 billion, indicative of UK being a crucial market for international companies with more overseas IPOs than all other leading European exchanges combined. The listings further continued in the final quarter during December 2018, thus concluding the year positively. Some of the key names for the IPOs were seen to be Aston Martin and Smithson Investment Trust that raised significant proceeds. Additionally, many market reports suggested that financial services were at the forefront in 2018, with more than 50% contribution to UK IPOs, followed by software with 11% and support services with 8%. Financials also accounted for almost half of the funds raised, followed by automobiles and software.

Nonetheless, the effects of the ambiguity and speculation surrounding the referendum can still be observed from the performance of the stock market in UK. Evidently, it is fluctuating. According to an EY report, the initial public offerings (IPOs) have recorded a year on year decline, i.e., about 79 IPOs raised GBP9.5billion in 2018, down from 2017 when about 95 IPOs raised GBP12.4billion. The EY IPO eye report predicts that IPO activity in the first quarter of 2019 will be gloomy as companies await the final result of Brexit negotiations and also because of the global market slowdown.

Moving on to a closer look to perceived investor behaviour, the British pound (though on some recovery lately) was noted to be at its lowest level versus the U.S. dollar since April 2017. The depreciating U.K. currency and flight to quality has caused an increase in buyers of comparatively safer Treasury bonds and dollar-backed assets. Thus, giving the evident push up to the U.S. dollar since early 2017. Yet, the dollar’s strength could not be so yielding for the U.S. investors because a strong dollar weakens the financial performance of companies engaged in extensive international businesses, a segment of the global market that is highly vulnerable due to the ongoing trade-war talk. The example can be drawn from the crashing shares of Caterpillar Inc. and Cummins Inc. as seen in 2018, both trading largely with China. On the global front, with Federal Bank tightening its monetary policy, there’s unlikely to be much relief for multinational stocks that are susceptible to the effects of both currency headwind and aggressive trade policies.

Given the dubious global scenario in 2018, most investors are already averse to any kind of risky investments in 2019. The consequence being a rather safe and defensive portfolio adjustment, excluding growth-oriented equities and multinational stocks and towards short-term bonds and gold. This is because possibility of a loss amidst expectations of higher interest rates is far less of a risk in bonds with shorter durations. For instance, the short-term investment-grade corporate bond funds such as the Vanguard Short-Term Corporate Bond ETF or the iShares Short-Term Corporate Bond ETF both offer a decent yield and have declined only by 1% in 2018 despite a steady increase in interest rates. This boosts the confidence of investors and there’s a robust reason for this stability to continue in 2019. In addition, gold remains the safest best for investors throughout. The ongoing unrest and rush in the U.K. to reorganise before the Brexit deadline has restricted many investors to wait and engage in any sort of activity thereafter. The bearishness of the stock market can surely be attributed to the impending Brexit. However, there are other factors contributing to the global slowdown as well. Post the Brexit resolution event, the market may see some changes or for that matter some rise in the IPO activity in UK but this needs to be watched out. All in all, the equity landscape would be key to watch amidst the volatile scenario.