On Tuesday 13 November the market started to hear the first hints that the UK and EU had reached an agreement on the wording of the draft Brexit agreement. It was instructive to see how the market reacted in the last hour of trading on that day.
Despite nothing being confirmed, sterling (predictably) was up sharply – sterling vs dollar was up 1.2c.
UK house builders accelerated into the close with Barratt Developments up over 4% for example and hanging onto those gains on Wednesday 14 Nov.
UK domestic exposed banks also rose into the close on Tuesday. Barclays was up over 2.5%, Royal Bank of Scotland up over 2% and Lloyds up nearly 1.5%.
However not all domestic sectors rallied on the news. For instance general retailers, which are facing structural challenges on the High Street, did not perform as a group despite a stronger exchange rate theoretically reducing their cost of goods.
We believe that last point is critical when assessing stocks in a ‘post-Brexit’ environment. Just because Brexit risk would be reduced on a successful deal, not all domestic stocks would instantly become attractive. Selectively will still be key when assessing the longer term opportunities. Data sourced by Bloomberg as at 15 November 2018
Whilst it is a positive that the EU and the UK have reached an agreement on the draft wording, we would caution that we are still at an early stage of the ‘endgame’. As the chart below illustrates the route from here to a final agreement is still fraught with potential pitfalls. However, the moves in stocks over the last two days do show the potential upside in stocks that have been held back by Brexit fears if we see a successful resolution in the coming months.
The many steps to getting a deal
Source : Exane, J.P. Morgan Asset Management. As at 30 September 2018.
Those potential pitfalls were brought into focus on Thursday morning when Brexit Secretary Dominic Raab and Work and Pensions Secretary Esther McVey both resigned, causing sterling to fall sharply, giving up all the gains of the last two days. Housebuilders, banks and retailers all fell sharply as a result.
James Illsley is a portfolio manager for the JPM UK Equity Core Fund
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