There’s nothing certain in the world of politics, but my guess is that the UK will actually end up leaving the European Union. It could be at the end of October, or it could be later and after a general election, perhaps. But my working assumption is that we will leave.
If and when the UK does leave the EU, what does that mean for investing? Nothing much at all, in my opinion. I’ll still be hunting for companies with decent growth prospects and attractive valuations so that I can buy some of their shares and hold them for the long term.
Reasons to be cheerful
But right now is a great time to be involved in the stock market. The delays to Brexit have extended the period of uncertainty and many firms have been holding back from reinvesting into their businesses until they know how the cards are going to fall. That situation could be holding share prices back. But while we are in this pre-Brexit limbo, the pound has been weak against other major currencies such as the US dollar and the euro.
A number of advantages flow from a weak pound. It’s good, for example, for the UK’s exporters because it makes their goods cheaper for foreign customers. It’s good for attracting foreign tourists to the UK because everything in the country is cheaper for them compared to when the pound is at higher levels, which should benefit many UK-facing businesses who can sell more.
The weakness in sterling also makes property and other assets look cheaper in the UK for foreign investors, encouraging an influx of outside money potentially able to pay ‘top dollar’. Many of our stock-market listed companies fall into the category of cheap-looking assets as viewed through the eyes of non-UK investors, and that’s why we’ve been seeing quite a few takeover offers lately. If a share you’re holding receives a bid, it’s usually at a juicy premium!
Yet many of our public limited companies have vast operations abroad, in places with strong currencies such as the US and Europe. When they’re earning in, say, the US dollar, that translates handsomely when expressed in pounds to boost earnings in the accounts. Indeed, with the pound weak, foreign earnings can be worth more than earnings derived in the UK.
Brexit preparations on track
When I’ve been trawling through company reports lately, many stock market firms appear to be happy with their Brexit preparations and reasonably sure that a change in tariffs, for example, will not affect their businesses much.
Some have expressed concern that Brexit could cause a general recession because of the way it may affect consumer confidence, but recessions come and go for many reasons anyway, and the cycle will likely turn up again as it always has done.
It’s hard to time the market, but I reckon the biggest risk is being out of the market altogether if you are an investor with a long-term focus. So, I’d buy firms with a steady record of trading, robust economics, and strong trading niches. Or, I’d simply buy ‘the market’ and invest in low-cost, passive index tracker funds. And I’d do it now, before Brexit, as well as after Brexit has eventually happened.