The prospect of Britain leaving the EU without a deal has led investors to keep their distance from sterling, British businesses and the London property market. However, as it now seems likely that Britain will be given extra time to make concrete arrangements and to find solutions to pressing issues such as the Irish border, the pound has been seen to rally significantly against the euro.
We should not expect a major change in attitude from the investment community though, as it seems that this merely confirms the general sentiment that has been held for some time. Certainly since the start of this year most investors have believed that Article 50 will be extended, and back in January investors were generally optimistic about a proper settlement being reached eventually between Britain and the EU.
Complex factors
Investors are watching Brexit negotiations closely, but these aren’t the only factors affecting market prices. The media is quick to assume that any fluctuation in the value of sterling, or overall dip in the stock market, must be caused by “Brexit uncertainty.” In fact any number of other issues could and do cause values to rise or fall, yet Brexit makes the headlines because it is an easy, catch-all scapegoat. The sense of impending doom now associated with the phrase sells papers, but its use means popular journalists can avoid having to explain more complex financial realities.
Expert analysis
Anyone thinking about making new investments in the current climate, or anyone that wants to understand the real science behind the markets, should look beyond the headlines and consult industry experts instead. Forex chart information will give you a better grasp of how sterling has been performing against other currencies, and how it is likely to measure up over the coming weeks, than sensational front page news stories. Similarly the behaviour of the stock market is a lot more nuanced and complex then most commentators would have you believe.
No need for panic
Nevertheless, when the outcome of the Brexit referendum was announced in June 2016 it led to $2 trillion being wiped off the value of the international stock market. Partly this was because many investors really didn’t believe that the British public would vote to leave the EU. The rush to sell shares was perhaps disproportionate and reflected shock and surprise rather than any genuine economic crisis.
This is the way that markets work however. Investors tend to be a skittish lot, and the true situation is often less important than what investors believe to be the true situation, at least in the short-term. A few scared shareholders selling up can create a domino effect and before you know it a full-scale panic is underway.
The good news is that the market will eventually right itself to accurately reflect underlying economic realities. Those investors who are stout of heart and resist joining with the panic may find – if they can hold out long enough – that their more sober forecast is justified. To some degree, sterling and UK equities soon bounced back from that initial plunge, and while sentiment has certainly been affected by the ongoing Brexit wrangle over the last couple of years, it has by no means been as bad as many initially predicted. Historically they have underperformed, but they have not collapsed.
Risk averse
The political quagmire has caused investors to become more risk averse, and managed money has been carefully moved out of UK assets for safety’s sake. There have also been fewer businesses making initial public offerings than one might expect. But the overall response of investors to Brexit negotiations has been to do nothing. This makes sense: after all, the main problem with Brexit has been that nothing is happening, and so the majority of investors have simply extended their policy of “wait and see.”
If the UK Parliament can agree on a deal, and have it accepted by Brussels, then the market will breathe a sigh of relief and move on. Depending on the nature of the deal this could be good or bad for sterling and British equities, but in most cases any deal will be seen as a positive thing. Similarly if Article 50 is extended, meaning that the UK has more time to come to an agreement, this will be seen as meaning a “no deal” situation is less likely. This too is a positive outcome, although most investors will continue to “wait and see.”
Britain leaving without any deal is the only outcome that would be unequivocally bad for the markets, if only because most investors don’t believe this will happen. For the moment though, international events are actually more relevant to the UK stock market than domestic speculation. Yes, Brexit is a big deal to investors but it isn’t everything.
