What will happen to markets when – and indeed if – Brexit is finally resolved? Over the past few weeks we have had a few tantalising signals. The day after Boris Johnson met the Irish Taoiseach, Leo Varadkar, at wedding venue in the Wirral and the chances of a deal hugely increased, the FTSE 250 surged by four percent. It seemed to be an obvious relief rally – investors had concluded that a no-deal was far less likely and therefore UK company profits were less likely to suffer from the imposition of tariffs and other barriers when doing business with other EU countries.
Yet, come the farce of ‘super Saturday’, when the deal agreed between the government failed to be approved by the House of Commons, and the chances of a no-deal shot up again, the FTSE 250 did not fall back significantly. It is a sign, perhaps, of just how undervalued UK companies have become relative to those in other developed economies. In 2019, the FTSE has risen 6.4 percent, fall below the main indices of Japan (12 percent), US and France (19 percent), Germany (20 percent) and Italy (22 percent).
The idea that UK shares have suppressed valuations is supported by the continuing interest in UK companies as takeover targets. It is tempting to believe that there is great pent-up demand for UK shares which would suddenly be expressed as soon as a Brexit deal became reality.
The FTSE 100, however, has not enjoyed the same rebound. While the FTSE 250 is up a modest one percent over the past month, the FTSE 100 is four percent lower. This has quite a lot to do with the nature of the large companies quoted in London – many have a very international focus. Consequently, a sharp rise in the value of the pound has reduced their earnings when measured in sterling terms. Perversely, a fall in the FTSE 100 can be a symptom of greater confidence in the UK economy.
But even if Brexit is resolved in the near future, it will take place against a deteriorating global economy. No one should be surprised if we end up with global recession – we haven’t had one for a decade, which is quite a long time by historic standards. A recession is not a foregone conclusion, however, and there is reason to hope that the UK may be relatively lightly affected. Deutschebank, for example, has pencilled in growth for the UK in 2020 of 1.3 percent – against only 0.8 percent for the Eurozone. How odd that we keep being told how Brexit will damage the UK economy – and yet one group of economists employed by a German bank is rather expecting the UK to outperform the Eurozone.
It is not unreasonable to think that at some point there will be a correction in the relative positions of UK and other stockmarkets. Not that that means, of course, that any stockmarket is necessarily going to go up in the near future.