In recent weeks, an abundance of UK-focussed stocks have enjoyed an upsurge in buyer interest. The investment community had been fearing a Halloween horror in the form of a cliff-edge Brexit, but fresh manoeuvring in Westminster has seen the prospect of an no-deal withdrawal from the European Union pushed a little further down the road.
Leading the breakout has been auto retailer Pendragon (LSE: PDG), its share price booming 54% since the start of October, making it the biggest riser on the FTSE All Share index. However, as I pointed out in a recent piece, I believe the euphoric buying of some stocks is a little hard to fathom. And Pendragon falls firmly into this category.
The threat of an economically-destructive disorderly Brexit is still possible at the end of January. And under the range of likely scenarios following the December 12 general election, trading conditions threaten to remain difficult for some time yet.
Brexit bother to persist
Under current polling projections, it looks likely another hung parliament — i.e. a situation where no political party has an overall majority — is set to be returned. It’s this very situation that’s caused the Parliamentary paralysis of the past two-and-a-half years and prolonged the Brexit uncertainty that’s damaging economic growth.
Now let’s dig a little deeper. Let’s say a minority government led by Boris Johnson is in charge from mid-December. Pushing the no-deal Brexit button in the first quarter is something he remains prepared to countenance.
But let me suggest that Parliament, frightened by the prospect of leaving the continental trading club without a deal, vote to push Johnson’s recent deal with European Union lawmakers over the line. Government analysis shows this scenario also has the prospect to deliver the domestic economy a hammerblow for years to come, reducing GDP by 6.7% over the next 15 years and making Britons £2,250 poorer each year through to 2034.
The other only likely alternative to Johnson retaining his premiership is Jeremy Corbyn and his Labour Party securing the keys to Downing Street and running a minority government. Under this scenario, investors can look forward to Brexit uncertainty being drawn out until the summer when a second referendum on leaving or remaining in the European Union would be held. And, of course, should the people return another Leave victory then we would all be returned to square one.
Exit the dragon
The outlook for Pendragon is more than a little testing then, but don’t take my word for it. Just last week, the retailer declared that “we continue to expect economic and market conditions to be challenging, with the ongoing uncertainty around Brexit impacting consumer confidence.”
The small-cap saw like-for-like sales drop 8% in the three months to September because of tanking used car sales — these were down almost a fifth year-on-year — and faces the prospect of patchy demand for new and pre-owned autos for much longer too.
So forget about City predictions Pendragon will bounce back from losses in 2019 to move back into the black next year. It’s likely that these estimates will be hacked back in the months ahead and this could cause a sharp correction in the share price.