Uncertainty over Brexit has prompted consumers and companies to put off investing in British stocks. Once clarity returns, cheap stocks should rebound, says David Stevenson.
I’ve long believed that Brexit has resulted in two major dislocations. The first is that many UK domestic businesses have postponed decisions until there is more clarity. The second is that sterling has been oversold and is now cheap.
Once clarity returns, then, there is a decent chance that British businesses will rebound and consumers will also find themselves in a slightly cheerier place. Many businesses are looking for a chance to take part in the global economic upswing, but they are currently sitting on cash waiting for the fog to lift. It’s a similar story for institutional investors eyeing up UK assets, which, as MoneyWeek has repeatedly pointed out, are now looking cheap.
Exactly how the turmoil of the next few days will end and the fog lift is anybody’s guess; my money is on either an extension (by more than a few months), or, by some miracle, the government’s proposal passing. But the bottom line is that there is a decent chance of a UK Brexit rebound at some point this year – assuming, of course, that said rebound isn’t knee-capped by the emergence of John McDonnell as chancellor.
How to ride the rebound
One way to play the bounce is via UK-listed, sterling- denominated exchange-traded funds (ETFs). In the table below I’ve listed either the biggest by assets under management, or the cheapest (based on the total expense ratio, TER).
Choose your index carefully. The FTSE 100 is, as we all know, a globally diversified index of international blue-chips where most of the earnings are denominated in a foreign currency. So every slump in the sterling-dollar rate (“cable”) ends up giving these firms a boost in foreign profits. A rebound in sterling might therefore actually be bad news for some constituents of the blue-chip index.
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