Abu Dhabi, UAEWednesday 18 September 2019

Both a no-deal Brexit or no Brexit at all leave investors with a big dilemma

British expatriates and non-UK citizens with financial interests in the country should tread cautiously over the next few months

 Prime Minister Boris Johnson says the UK will exit the European Union on October 31. AFP
 Prime Minister Boris Johnson says the UK will exit the European Union on October 31. AFP

Although British expatriates in the UAE are enjoying higher salaries in terms of the pound sterling, they face a difficult dilemma over whether or not to invest in their home country. It's an issue that also applies to non-UK citizens considering a punt on this beleaguered nation.

If you think the UK will actually exit the European Union on October 31 - as its new Prime Minister Boris Johnson says - then you might consider waiting for the pound to fall further after the event as foreign exchange analysts are almost unanimous in forecasting.

As an investor, if you assume Brexit is not going to happen then you have more to consider than just the immediate impact on sterling.

Peter Cooper

Then again, if, as I believe, Mr Johnson is about to fall off his high-wire act, the best time to buy sterling is probably around now. If this black cloud hanging over the UK economy was lifted, the value of its currency would surely soar.

Before the Brexit referendum a little over three years ago the pound hovered around $1.50 as opposed to nearer $1.20 today.

The British press is allowing Boris Johnson his honeymoon as the new Prime Minister. He has embarked on what virtually all observers see as the start of a General Election campaign, with populist spending promises and a lightning tour of the country.

But Mr Johnson is only being wise in making hay while the sun shines. Even the best opinion polls show his support levels flagging at about 30 per cent, not enough to win him a majority in an upcoming election - assuming that he loses a no-confidence vote in the House of Commons early in September and is forced to call a General Election.

His majority in parliament is just one and a renegade Conservative MP, former justice minister Phillip Lee, has said he will decide over the August parliamentary holiday whether to continue his support.

Meanwhile, Mr Johnson’s new unelected, right-wing government - installed after the 0.27 per cent of the population belonging to his party elected him as their next leader and therefore Prime Minister - is about to battle strong opposition from at least five directions in parliament.

There is the official opposition Labour Party; the Liberal-Democrats with a new, young leader; the SNP who dominate Scotland; the DUP from Northern Ireland who supported Mr Johnson’s predecessor’s Brexit deal but strongly oppose no-deal and finally the substantial cabal of rebels in his own party led by the last finance minister Philip Hammond.

Outside of parliament, the City and businesses are overwhelmingly against Brexit, with a variety of major legal challenges being lined up to undermine the push for a No-Deal Brexit that Mr Johnson has promised by "whatever means".

Can the new Prime Minister really triumph over such overwhelming opposition? This is Brexit's last stand.

As an investor, if you assume Brexit is not going to happen then you have more to consider than just the immediate impact on sterling.

UK share prices have been quite strong throughout the whole Brexit storm but it is important to realise this has been almost entirely due to the fall of sterling. Why?

The UK stock market is highly diversified internationally, so when foreign companies report their overseas profits in pounds in London they are automatically higher when sterling is moving lower. That keeps their share prices high.

Unfortunately, the reverse also applies. When sterling gains in value, the automatic effect on the UK stock market is to move lower. There will not be a relief rally because of the improved economic outlook for UK-based companies, far from it.

Watch out if you are an investor in long-term tracker funds in UK stocks. The hit that comes from sterling as Brexit fails could take a long time to recover, particularly if it happens during the downturn in global stocks many analysts are expecting soon.

You would suffer a double whammy, the last thing you might anticipate in these supposedly safe investments.

UK residential property and a failed Brexit is harder to read. If you are planning to buy a home, then securing your sterling payment at present low exchange rates would make good sense.

That said, with UK house prices as high as they are now, and a possible global slowdown on the horizon you could argue that plunging into this market represents a large downside risk for a relatively small upside potential.

I recommend diversification into precious metals at this point in the investment cycle. Their prices have lagged behind recent gains in global stock markets, and actions to counter a stock market correction would have the most immediate impact here.

Peter Cooper has been writing about Gulf finance for two decades

Updated: August 18, 2019 10:17 AM

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