As Britain formally declares its intention to withdraw from the European Union, here’s what could happen to your assets once Article 50 has been invoked.
Do you have Wednesday March 29th penned into your diary?
For investors around the world, it’s a date that’s loomed large for over eight months.
It’s the day that British Prime Minister Theresa May triggers Article 50, marking the official declaration of the UK’s intention to leave the European Union.
Once Mrs May has done this, it will kick start a two-year negotiation process between the UK and the EU, which aims to decouple Britain from the Union and map out the ongoing future relationship between the two parties.
So what will happen to investment markets on March 29th when the Prime Minister invokes Article 50? Can equities investors expect more volatility? And how might it impact on performance in the UK property sector?
More fluctuation for the pound?
Since June’s referendum, the pound, renowned for its strength and used as a hedge against many other global currencies, has endured an unprecedented period of volatility.
Three key movements:
- 24 hours after a vote for leave was confirmed, sterling dropped to a 31-year low against the US dollar, as speculators made knee-jerk reactions due to the high level of uncertainty the result had just created.
- It then started to slowly regain strength, before rhetoric at October’s Conservative party conference raised the prospect of a ‘hard Brexit’, causing the pound to drop to another three-decade low.
- But in January it registered its biggest one-day gain against the dollar since 1998, after the Prime Minister’s Brexit speech at Lancaster House where she pledged that parliament would be able to vote on the final proposed Brexit deal.
All the above underlines the lack of real substance behind each move. Markets and speculators alike have been so spooked by the landmark political event, that any new soundbite, any new positive or negative media headline has prompted fluctuations in sterling’s value.
When Mrs May triggers Article 50, it’s likely the pound will experience more turbulence. While nothing will actually change on Wednesday March 29th, it’s likely to prompt speculators to make further reactive moves, marking another key moment in the currency’s journey since the Brexit vote.
What about equities?
A quick search of the internet will show you headlines suggesting that Brexit has, largely, been a shot in the arm for Britain’s stock markets.
But this isn’t necessarily the whole story.
The FTSE as a whole was Europe’s best performing major stock market in 2016, defying all pre-referendum predictions upon the outcome of a leave vote.
Closing 2016 at 14.42% up, the FTSE 100 added around £230bn to the value of its listed companies. Yet those headline figures mask the key to its success.
Of those 100 companies listed on Britain’s major index, the vast majority do most of their business outside of the UK, meaning that a large proportion of their earnings are in foreign currencies.
With the pound hitting 31-year lows following Brexit, it meant that many FTSE 100 companies made significantly more money last year.
Conversely, the FTSE 250 ended 2016 up just 3.7%, with its domestic-based firms unable to recoup post-referendum losses to the same extent.
So what will happen when Article 50 is triggered?
Whatever happens to the pound, UK equities are likely to follow suit. A loss in value against the dollar is likely to spell more good news for those big companies on the FTSE 100, and further strife for UK-based FTSE 250 firms.
But with so much uncertainty and new developments expected over the next two years, it’s not unfair to assume that stocks will fluctuate just as wildly as sterling.
And once the pound begins to regain its strength as Brexit negotiations lift much of the current uncertainty, expect those FTSE 100 gains to level off.
Will UK property performance be affected on the Article 50 trigger date?
Unlike assets such as equities and bonds, real estate has a very low correlation to external political and economic events that cause financial markets to rock.
This has been demonstrated clearly since Brexit. In January the average UK property price rose to £300,000 for the first time, representing growth of 3.2% over the last 12 months.
In the rental market, recent projections from the Royal Institution of Chartered Surveyors (Rics) suggest that investors will see rental rates rise by 25% over the next five years.
Quite simply, the UK doesn’t have enough properties to keep up with demand, both from potential buyers and tenants. With housebuilding levels at their lowest for a generation, each British property currently has 11 potential buyers.
It’s this imbalance that underpins the property market’s strength. Mrs May triggering Article 50 will not suddenly change this significant property shortage.
What’s more, should the pound continue to fall against the dollar, it will simply increase the demand for British real estate among the global investor community.
In Q4 last year alone, overseas demand for UK property was reported to have spiked by as much as 45%, with those buying in dollars and other currencies pegged to the greenback able to acquire British assets with greater affordability.
If the pound endures more turbulence, it will further underline the immediate opportunity to buy an asset that may prove to be the best investment over the next few years.
(Editor’s update March 14th: Theresa May will now invoke Article 50 in the last week of March, according to government sources. Read more here.)
(Editor’s update March 20th: Theresa May confirmed that she will trigger Article 50 on March 29th)