Could the Brexit deal lead to a roaring 20s for the UK stock market?

As 2020 draws to a close we finally have some good news: a Brexit deal. When the detail is revealed, it probably won’t be what was promised, or even hoped for when the referendum took place, but it is a deal nevertheless and a hard Brexit on 1st January has been avoided.

As Richard Buxton, manager of Merian UK Alpha, commented: “The potential damage to both sides from a ‘no deal’ – exacerbated by the ongoing impact of the pandemic and lockdowns – was too great to go down that road, and for all the inevitable bluster, threats and counter-threats along the way since Brexit, we have an eleventh hour agreement. Skinny, lightweight, the bare minimum required but a deal, nevertheless. This has to be good news for investors in UK equities.”

The deal removes the cloud that has been hanging over the UK for more than four and a half years and it will allow UK plc to finally have more certainty and the ability to plan ahead, reinvest and grow businesses.

“Global investors may well bide their time to see how the UK fares in its newly negotiated relationship with the EU before plunging back into UK equities,” Richard continued. “Any January scenes of lorry queues at British ports (of which we have of course already had a foretaste), reports of obstacles to the smooth passage of goods or an inability of supermarkets to source avocados – heaven forbid! – will only encourage such investors to stay their hand before rushing to take their underweight exposure to UK stocks back towards a neutral (or even overweight) position.

“Non-UK companies looking to acquire UK assets may be rather quicker off the mark, however. Merger and acquisition activity has been picking up, and an end to ‘no deal’ uncertainty may well spur more international companies or private equity firms to press ahead with plans to acquire UK assets in a currency still cheap on ‘purchasing power parity’ yardsticks.”

“Now if that pesky virus could just calm down, it might not just be the global population enjoying a ‘roaring 20s’ in the coming years but the UK stock market too,” added FundCalibre’s Darius McDermott.

Where to invest to make the most of the deal

Over the past four and a half years, European equities have done decidedly better than their UK counterparts. The average fund in the IA European Smaller Companies sector is up 69%* and the average fund in the IA Europe ex UK sector is up 59.3%*.

In comparison, the average IA UK All Companies fund is up 25.1%* while the average IA UK Equity Income fund has managed to return just 13.3%*. Only the IA UK Smaller Companies sector has managed to hold on to the European coattails, returning 57.7%*.

“UK equity income funds have had a torrid time of late,” continued Darius. “Not only have they felt the effects of Brexit, but COVID has led to many dividend cuts and, as income investing generally leads you to value parts of the market, these funds have also been hit as value sectors have been impacted the most by the virus.

“But this also gives us an opportunity to make good money now over a five year basis. Not only could the share prices of these companies be given a boost by more certainty and positive news flows but given the cuts in dividends we’ve experienced in 2020, there is a lot of scope for dividend growth too.

“While many bourses around the world have regained their pre-COVID highs, ours has not and it remains cheap compared with its global peers. So valuation support, some post-deal Brexit positivity, attention from investors and another vaccine bounce may all lead to better times ahead.”

Four equity income funds that could reward in 2021

Artemis Income

This fund has been a stalwart of the UK equity income sector for two decades and has an excellent team and a strong process. It is designed to offer a diversified, eclectic mix of cashflows from different companies to ensure a sustainable and durable income.

GAM UK Equity Income

Launched in October 2017, this UK equity income fund invests in companies of all sizes – from the very small and those listed on the AIM stock market, through to the FTSE 100. The manager can invest some money in a company’s bond if he feels the opportunity is better.

LF Gresham House UK Multi Cap Income

This concentrated multi-cap income fund has a bias towards smaller companies and a manager with unrivalled experience in the small-cap space. This makes it a compelling choice for those looking for capital appreciation and an attractively growing income.

Schroder Income

Schroder Income is a deep value-driven fund that invests in companies valued at less than their ‘true’ worth and waits for a correction. It tends to avoid the big income producers in favour of more niche names, where both capital as well as income can grow significantly.

*Source: FE fundinfo, total returns in sterling, 23 June 2016 to 23 December 2020.

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.