JPM Strategist

UK equities during the Brexit snowstorm

In recent weeks, a few colleagues of mine have returned from the Alps with skiing injuries.

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Mar 20, 2017
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Now we all know that there’s no reward without risk. Green runs don’t offer the same thrill, there’s not the same rush of adrenaline and wind in your hair as you get from skiing off-piste. And if you’ve got the requisite experience and it’s a clear day, who am I to tell you what your risk appetite should be? But if you find yourself high up a mountain and a sudden snowstorm obscures the path ahead, you’d be well advised to save the heroics for another day and not deviate too far from the safest path.

The upcoming Brexit negotiations are just such a snowstorm for the UK economy. Nobody knows for sure what damage will be done by the storm or whether we’ll look back on it as laying the foundations for a bright future. But what we do know is that for the next couple of years UK investors can’t really see where they are going. Decisions that could have huge effects on the UK economy and the relative performance of various sectors hang in the balance, caught between the competing interests of the UK and European negotiators.

The winners and losers in the stock market will depend on the impact of the negotiations on the UK domestic economy, on trade arrangements and on the pound. As we have seen recently, bad news for the UK economy, which weighs on sterling, can be good news for those UK-listed companies that get most of their revenues from abroad. On the other hand, a good deal for the UK could lead to stronger performance for domestically focused companies. So the uncertainty isn’t necessarily bad for UK equities, but knowing which UK sectors will do best is extremely hard at the moment. The future for different sectors is never certain, but rarely is it so uncertain as today.

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The investing equivalent of skiing off-piste are funds with a high tracking error to the benchmark, which can use their skill to steer far away from the well-trodden path, trying to swerve dynamically around the pitfalls, making high conviction bets on what lies around the corner. High risk but also high potential reward. And for years, the conditions have been perfect for these types of funds, with top managers significantly outperforming their benchmarks.

But now that the clouds are obscuring the view, the high-conviction, off-benchmark, star fund managers may not provide the safest pair of hands to navigate the uncertainty ahead. With their vision impaired, no amount of skill can help foresee what lies ahead. The safer course is to slow down and stick to the path that has already been cleared, to bring tracking error down, not to veer too far from the benchmark.

In this uncertain environment, investors in the UK may benefit from taking smaller active positions than they have historically done. That means smaller sector, stock and size bets relative to the benchmark. One way to do this is to buy a tracker, but then you guarantee you will underperform after fees. Perhaps better to buy a fund taking only small active positions, with proven ability to consistently beat the benchmark after fees but which takes less relative risk than most funds do and accordingly charges lower fees. This lower-risk approach, like sticking to the green runs, may not be that exciting and the potential for outperformance is lower but so is the potential for terrible accidents. Call me boring but I’ve always thought it better to come back from holiday with a tan than a broken leg.


The JPM UK Equity Core Fund aims to produce consistent returns from the UK stock market over time, while rigorously controlling risk through its benchmark-aware approach. Read more about the fund >


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Go to the profile of Mike Bell

Mike Bell

Market Strategist, J.P. Morgan Asset Management

Michael Bell is a global market strategist within J.P. Morgan Asset Management's Global Market Insights Strategy Team. He is responsible for communicating the latest market and economic views in the UK and around Europe.

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