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Brexit: it is still worthwhile to invest in the United Kingdom?


 The United Kingdom has won a reprieve from the European Union on its exit deadline to 31 October 2019. This gives it time to avoid a no-deal Brexit. But this also means that it will be putting up candidates in next May’s European elections, unless it signs an exit agreement with the EU between now and then. The first polls are now coming out, and they are highly instructive.

A survey conducted on 10 and 11 April by the YouGov institute for The Times revealed the emergence of new political movements that are eating into the traditional base of the Tories and Labour. The survey found that only 16% of voters plan to vote Conservative and 24%, Labour. In the event of early elections to the UK Parliament, the findings are a little more favourable to the two main parties, with 32% for Labour and 28% for the Conservatives, or 60% combined, down from 80% as recently as 2017.

In the run-up to European elections, pro-Brexit movements like Nigel Farage’s Brexit Party and UKIP are polling at 15% and 14% of voting intentions, respectively. On the Remain side, the Greens and the leftist Change UK movements are credited with 8% and 7% of the votes. This shows how much the UK political landscape has been changed by this now clearly structural split between proponents of keeping the UK a full member of the EU and those who want a return to greater sovereignty.

This political uncertainty is dragging down sterling, which reacts in knee-jerk fashion to any new news on the potential outcome of negotiations between the UK and the EU. However, volatility in corporate debt has not been affected so much by good or bad news flow, and the UK economy has, in fact, been rather robust. What’s more, many major UK companies have big international footprints. They are not overly sensitive to the UK’s economic cycle. While it important to take a selective approach, UK corporate debt is therefore still an investment worth considering, as long as you hedge currency risk is hedged.

As for equity markets, the FTSE 100 Index has increased by +10.41% since the beginning of the year in a context where the Sterling rose by +2.78% against the dollar and 4.22% against the euro. The UK equity market therefore also remains buoyant and above all dependent on the global economic situation. In the case of an equity investment, a weakening of the currency is less likely because it would increase the competitiveness of export stocks.

Article completed on 15 April 2019 by Florent Delorme, macro analyst at M&G Investments

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