A solid week for the FTSE - no deal is off the table (it seems)

Friday, 15th March 2019 12:32 - by Shant

It has been a pivotal week in the UK, with a series of votes from Tuesday to Thursday culminating in an agreement to ask for an extension to the Brexit date, which now needs to be agreed with the EU-27.  Midweek, there was a clear vote to take no deal off the table, and as much as this ties the hands of the UK negotiating team, it does nevertheless take some of the fear out of the possibility of crashing out of the EU. 

It is, however, still the case that the default position at the present time is that the UK will leave without a deal based on legal statute.  Even so, the EU has made it pretty clear that it also wants to avoid a disruptive outcome and is likely to agree to an extension.  How long and at what cost is now the question, but no doubt the weekend will deliver a host of opinion as well as commentary from Europe on the scenarios ahead of us.  

The EU summit next week will discuss this issue, but Theresa May is scheduled to re-table her deal to parliament for the third time in what looks set to be another volatile week. Why?  Well, the PM is putting her deal to the House in the hope that the DUP and ERG are ever more fearful that a no Brexit becomes a greater probability.  Few can argue that the government's line has been to pressure vested interests into this line of action, and with such a divided House of Commons, the current debacle was 'writing on the wall' some time ago.  Based on ongoing uncertainty, foreign investors are said to be refraining from UK investments as yet, though the balance of risks continue to point towards a soft Brexit, though the journey to this point will be fraught, if not tortuous. 

Nevertheless, avoiding an exit without a deal is and has been cause for optimism, and the UK indices have shown this in abundance as the FTSE 100 has recorded a near 2.0% gain on the week.  Technically, the leading index is back testing some key levels in the mid 7200's, which represented the 2019 highs seen in the middle of Feb.  However, given the trade surplus the EU enjoys with the UK, it was no surprise to see European bourses showing a little more jubilation on Wednesday, underlining the concurrent fears of a no deal either side of the English Channel (and the North Sea for those who want to be geographically specific).   European stocks have also been bolstered by last week's announcement by the ECB, which has fed through into the banking sector no less.  It is hard to see any major joy for UK banks just yet, as the Brexit process is still in its early stages, with this being the withdrawal deal only. Once the actual trade negotiations start, then the financial sector is set for a bumpy ride given the ongoing wrangling over the degree of access to the single market.  As such, I would remain cautious on UK banks as yet, though only HSBC has been a net loser this week, with the strongest gains seen in Lloyds.  HSBC is perhaps the least attractive proposition in the current climate due to its Asia centric lending backdrop. 

Pharmaceuticals have been a mixed bag as they tend to underperform in relative terms, and names such as AstraZeneca Glaxo SmithKline have both recorded losses (of varying degrees) on the week.  Given the UK has close ties to Europe in terms of exports of pharmaceuticals in exports, weakness here may offer decent buying opportunities with the added backdrop of scepticism over the broader stock market gains seen globally.  

In IT and Telecoms, it has been a strong week for the likes of Vodafone and the BT Group, with the stare of exports to Europe close to 50%.  Vodafone has had a strong week by outperforming gains in the index with over 4.5% rise, while BT has fared a little better with gains of over 5.0%.  

While there is clear scepticism over the Brexit process going forward, we are getting signs that the fog may be starting to dissipate a little.  There is a long road ahead, but asset managers are neutral to underweight UK assets so we could see a sharp rise in activity as and when UK parliament finally find a route through the political mess they have created for themselves, so looking ahead will pay swift dividends.  As noted earlier this, the Norwegian Wealth Fund is already looking to size up investments in the UK, and the timing is perhaps telling given the change in mood in the House of Commons which has been so openly 'advertised'. 

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.