After the vote, Brexit uncertainty could unearth ‘big bargains’

Following the vote, the market was now assuming the Brexit timeline would be extended or there would be some improvements to the deal to make it more palatable to parliament, the fund manager said.

“Brexit could have been solved simply: a complete exit and a free-trade deal with Europe,” the Sydney-based long-term global stock picker said. Instead, Britain’s exit from the EU had turned into “an almighty mess”.

“People are just shaking their heads,” he said. “There’s been so much wasted time.”

Mr Moore also took aim at Europe’s part in the Brexit process. “Europe is worried that Italy will follow suit because they haven’t shored up Europe,” he said. “Both sides are concerned about issues other than Europe.”

Devastating defeat

The latest twist in Brexit saw Britain’s House of Commons deliver a devastating defeat to Prime Minister Theresa May’s blueprint to take Britain out of Europe, rejecting her plan by 230 votes – the biggest margin of defeat for a British government motion in more than 100 years.

The defeat was widely expected and was followed immediately by Mrs May’s inviting Britain’s Opposition Leader, Jeremy Corbyn, to table a no-confidence motion in the government. Mr Corbyn took up the invitation and the motion is to be put to the vote at 6am on Thursday (AEDT).

Mrs May, who already has ruled out resigning as Prime Minister, is widely expected to win the no-confidence motion after her small Northern Ireland ally, the Democratic Unionist Party, quickly pledged to back her.

Investors reacted to Tuesday’s vote by pushing the pound higher, with the British currency taking back a fraction of the heavy losses it has made since the referendum in mid-2016. The pound has fallen about 13 per cent against the United States dollar since July 2016.

 

“From the market’s point of view, I think that the probability of a hard Brexit has fallen,” BNP Paribas Asset Management senior investment strategist Daniel Morris said. “That’s what we have seen in the relative reaction of sterling.”

Mr Morris was referring to a situation where Britain reaches the March 29 deadline without a deal in place with the EU. Still, the pound’s gains were of limited scope after the vote, he pointed out. “We haven’t rallied much,” he said.

Continuing uncertainty over the details and timing of any deal is keeping the currency under pressure, Mr Morris said. Parliament may now coalesce around one option or another, he said, but added “it’s difficult to hazard a guess what that will be”.

Mrs May will go back to the drawing board to try to get an amended deal through parliament before March 29. Other scenarios include an extension of the Brexit timeframe, a second referendum, a general election or a “hard Brexit”.

 

In the currency markets,the pound could gain if uncertainty eases around Brexit, Mr Morris at BNP said. “It’s going to be the reduction in uncertainty that’s going to benefit sterling.”

However, a rally in the British currency may not boost the sharemarket, the strategist said.

“If sterling rallies, that has a negative correlation with equities,” Mr Morris said. “Large-cap equities would suffer.”

Britain’s biggest companies are globally focused firms that generate much of their profits offshore.

 

Both the large-cap FTSE 100 index and the mid-cap FTSE 250 index have made strong gains since the referendum was held in 2016, with the FTSE 100 index up almost 17 per cent and the FTSE 250 up by about 15 per cent.

“If there is any offsetting positive, it would be in small-cap stocks,” Mr Morris said.

If uncertainly increases over the economy and Britain, “you should see a recovery in business investment and spending,” the strategist added.

 

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