On 31 January we’re officially exiting the European Union (EU). You may now be noticing headlines that discuss ‘Brexit II’ or the sequel to the UK’s June 2016 referendum to withdraw from EU membership.
Considering the significant uncertainty associated with Brexit and what we have experienced so far, not only in domestic politics but also in broader equity markets, real estate prices and the value of the pound, many investors would like to better understand how the evolving trading relations with the EU may impact their savings and investments.
Brexit II
Regardless of our own views on Brexit, this definite departure date in a week is for the most part a positive for British businesses.
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Afterwards we will have a transition period until the end of 2020, by which date the UK and the EU are aiming to have a comprehensive free trade deal that is acceptable to both sides. In other words, in Brexit II: the sequel, the focus is shifting to our future relationship with the EU and the rest of the world.
Depending on the nature of the deal, the UK will then likely be able to unilaterally negotiate new trade deals with major trading partners outside the EU.
An easy deal with the EU?
How easy will it be to reach a deal with the EU in 2020? I believe it will be difficult but not impossible. But your guess is as good as mine.
What may this mean for FTSE 100 and FTSE 250 shares? Well, in the long run I do not think it will mean that much. Good companies should be able to weather any short-term uncertainty.
And I do not think political events should get in the way of a long-term investment strategy. If I am happy to hold a company’s shares in my retirement portfolio, then Brexit, or any other external event, should not make too much of a difference to my portfolio holdings.
Furthermore, any potential weakness in a sector may give me an opportunity to buy dips in shares that might have been expensive to consider beforehand.
Which shares I’m watching
The UK economy itself is heavily services-focused with financial services playing a key part. And for many banks it has not been an easy ride for several years. Now I’m hopeful that 2020 will bring more visibility to banks, including Barclays, Lloyds Banking Group, HSBC Holdings and Royal Bank of Scotland. If you too believe that financial firms may benefit from an end to uncertainty, then you may consider doing further due diligence on them.
Elsewhere consumer-facing travel businesses may welcome the potential for a stronger pound as many UK holidaymakers have been delaying overseas travel plans due to the pound’s weakness. My current company choices would be British Airways owner International Consolidated Airlines, cruise operator Carnival, and travel and leisure business TUI Travel.
The bottom line
At the end of January, the UK will leave the EU. And a new chapter leading to new trade deals will begin, possibly creating opportunities for many sectors and companies.
If you’d like to have domestic exposure, but are rather worried about selecting individual shares, then you could buy into a FTSE 100 tracker fund.
Finally, if you’d like global exposure in your portfolio, an exchange-traded fund (ETF) to consider could be the FTSE All-World ETF.
