It’s official, Theresa May is planning the hardest Brexit possible for the UK. However, while we now know what tactics the government will be using in its negotiations over the next few years, it’s impossible to tell today exactly what the UK’s relationship with Europe will be when the divorce process is finalised.
So, even though investors have a little idea of what the future holds for the UK-Europe relationship, trying to plan ahead is fruitless.
Planning for uncertainty
No matter how the negotiations go, three or four years from now the UK business environment will be very different from what it is today.
If the EU blocks any agreements with the UK, May has said the UK will play hardball, turning itself into a free-trade tax haven. This might be good for businesses but a clampdown on immigration will almost certainly push wages higher as the labour pool contracts. Low margin businesses will suffer the most from this development.
The other key variable to consider is the outcome for financials. The loss of passporting rights to the rest of the European economic area will undoubtedly have some impact, although banks are already taking actions to limit the day-to-day impact on their businesses.
It’s already happening
The one thing we can be certain of, mostly because it’s already happening, is that over the next few years the country will have to get used to higher inflation. The falling pound coupled with immigration controls on low-wage work (as well as more skilled professions) will likely send company costs up across the board. Consumers may react to higher prices by cutting back on discretionary spending.
In other words, the only sectors that will most likely come out of Theresa’s hard Brexit unscathed are inflation-resistant, defensive firms. Of course, those businesses that have a significant presence outside the UK will also fare well. Domestic companies will be the ones to bear the brunt of the pain.
The best Brexit investment?
The UK’s leading index, the FTSE 100, may be the best way to play this trend. More than two-thirds of the index’s earnings come from outside the UK, and it has recently received a boost from lower sterling. What’s more, by buying into it as a whole via an index tracker, you’re bypassing company-specific risk. As it’s impossible to know which companies will fare best from Brexit, this is probably a excellent idea.
To sum up, at this moment in time it’s almost impossible to tell exactly what Theresa May’s ‘hard Brexit’ mean for your portfolio. However, it’s possible to speculate that inflation will be the main issue investors and policymakers will face over the next few years. Considering these facts, a FTSE 100 tracker fund may be the best bet for investors to ride out the uncertainties ahead.
