Monday rally shows how UK stocks could surge in the event of a Brexit deal

Russ Mould
3 December 2018

“With the US Federal Reserve now seen by some to be taking a softer line on interest-rate policy and the G20 meeting potentially generating some progress in trade relations between America and China, two of the UK’s financial markets’ three biggest worries suddenly look a little less fearsome,” says Russ Mould, AJ Bell Investment Director.

“That leaves Brexit and the Meaningful Vote in Parliament on Prime Minister Theresa May’s Brexit deal on 11 November.

“If – and it does look like a big ‘if’ at the moment – that deal is passed in the House of Commons, then the UK’s stock market could be poised to rebound like a coiled spring.

“The FTSE All-Share has done relatively poorly again in 2018, underperforming five of the other major geographic regions available to investors, from a geographical point of view, and doing better than just Asia and the Africa/Middle East region so far this year, in total return, sterling terms.

Source: Refinitiv data

“That underperformance shows that the UK equity market remains out of favour, a view point confirmed by the consistent outflows away from funds dedicated to UK stocks since the June 2016 EU referendum.

“But what this underperformance does mean is that the unloved UK stock market is potentially cheap. Based on aggregate consensus forecasts for 2019, the FTSE 100 trades on 11.6 times forward earnings with a yield of 4.8%.

“There remains the danger that the earnings and dividend forecasts upon which those multiples are based prove too optimistic but a Brexit deal of some kind would at least give investors a chance to stress test those forecasts. The prospect of no deal at all leaves everyone in the dark and that seems to be the one eventuality that stock (and for that matter bond and currency) markets seem keen to avoid.

“No-one should kid themselves that the worries over trade or monetary policy can be safely put to bed either. The Fed seems likely to raise interest rates for a fourth time this year and ninth time during this upcycle on 19 December and may push through further hikes in 2019, while Presidents Trump and Xi have only agree to do nothing for 90 days, to halt any escalation in their trade disagreement.

“We have no guarantee that trade and tighter monetary policy will not come back to haunt markets in 2019, having made it hard for investors to make money in 2018, but for the moment investors seem prepared to welcome the possibility that tariffs may not get worse and the Fed may slow its policy plan. That’s a potential dream double while a Brexit deal could make for a terrific trifecta for downtrodden UK stocks.”

Source: Refinitiv data

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