Triggering of Article 50 - phoney war tactics


Richard Buxton, head of UK equities and manager of the Old Mutual UK Alpha Fund, assesses the likely impact for investors of the triggering of Article 50, scheduled for 29th March.

Logic would suggest that the triggering of such a momentous event, and one which everyone knows is coming, should be fully discounted in share prices. The problem for investors is that we are not necessarily dealing with logic.

Negotiations between the two sides, over the course of the next two years, are likely to be very gradual, akin to phoney war tactics, with the objectives of European governments and those of the UK government so diametrically opposed that, in the end, very little is achieved.

A drip, drip of newsflow 

The investment and business communities are in a frustrating state of limbo as they attempt to respond to the anticipated drip, drip of newsflow. Whether or not the protracted negotiations will gradually wear away at corporate and consumer confidence remains an unknown. Of course, the ensuing uncertainty could lead to periods of volatility in markets.

The path of sterling; likely to dictate the stock-picker’s agenda 

The main investment opportunities that could arise look likely to be sterling related. A scenario could easily emerge whereby, given how far sterling has fallen, any perception in the coming months of a long transitional arrangement in terms of leaving the EU could translate into a significant rally in the currency. This would obviously have implications for UK mega-caps and UK-listed dollar earners, relative to more domestic names, where a fair degree of pessimism has already been priced into valuations. Equally, shorter-term newsflow may well be sterling unfriendly; that’s going to be quite a challenge for the sterling bulls.

Behind closed doors 

I am quite sure that, while there will be many European politicians who will be keen to voice their own opinions on negotiating tactics, in reality, we are going to have very little in terms of concrete signposts to work off for the foreseeable future. Prime Minister Theresa May was keen to stress in her Brexit speech to delegates at Lancaster House in January that negotiations would remain behind closed doors.  

Business as usual… up to a point

So, we could find ourselves in a situation where it is business as usual, thinking life goes on as normal, untroubled by the period of negotiations. Consumers and businesses will continue to spend. But there will likely come a time when investors, consumers, and corporates will demand more clarity before they commit to X, Y or Z. That’s the time when we will all be forced to reassess the situation.