A Brexit checklist

10th Aug '19 by Muggles

18 comments 1664 reads

It’s been a while since I’ve written a blog. Last year I blogged about my latest paper portfolio which experimented with different rules, but was largely based on the NAPS. When the market tanked, I ended up tying myself in knots with stop losses and rule changes, and so decided I needed to sit out for 6 months to clear my head and get some distance.

Now, I’m in the market again, this time with real money (*gulp*). I’ve spent a while crafting a reasonably straight forward set of rules, based again on NAPS, but which gives me a little discretion about which of the top screened stocks I choose. I also allow myself to disregard value rank from time to time to enable me to pick up some more expensive sectors. I’m drip feeding capital in every month, and hope to continue to do so, on the basis that I think I’m unlikely to be able to call the top or bottom of the market, so this approach should average out over the long term.

I’ve also been following the political turmoil of the last three years (and the last year in particular) with interest and no small amount of trepidation. I suspect I’m not alone in believing that things are about to come to a head with Brexit – either No Deal or No Brexit. As the shiny new stockopedia site likes to remind me “no pilot ever takes off without his checklist”, I therefore thought it was worth going through my holdings and creating a Brexit checklist to work out my exposure in the event of a no deal, and which companies I might expect to struggle over either the short or long term.

Assumptions

I cannot predict what will happen in the event of a no-deal Brexit, but I’ve made the following assumptions about what will happen. These are based of my reading of the news (mostly BBC and The Guardian), a little research, and what I remember of economics.

The value of the £ will fall relative to the € and $.
The cost of imports will rise
The cost of consumer goods will rise
Inflation will rise
Interest rates will fall*
Unemployment will rise
Employment costs will fall
House prices will fall

*the BoE doesn’t give much away about plans, but reading between the lines of interviews with Mark Carney, this seems the most probable response

I don’t…

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Bigclaw

10th Aug '19

Really good post mate, thanks for taking the time to submit it. Re the B-word, my thoughts are that it is more or less priced in by now given the long lead time we have had to leaving, but I think it's definitely worth revisiting holdings in the way you have done. On that note I am always slightly bewildered when people say they ignore macro / political news and concentrate on whether it is a 'good company' as the performance of said company is going to be linked to broader economic conditions.

The lesson I learned from the referendum is that the next time we have something similar (for example a close election that could go either way but with vastly differing outcomes) I would sell my holdings beforehand. I might miss that next day bounce but I wouldn't be exposed to the potential losses should the result go the 'wrong' way. The transaction costs of selling and rebuying my portfolio would have been very small in comparison with the referendum losses I sustained. I know some people take the same approach when company results and other events are forthcoming.

Zoiberg

The other elephant in the room (two? My, aren't we lucky!), is that twitter boy's tariffs are now having noticeable effects.

xcity

If you are primarily relying on The Guardian and BBC for your 'information' then you will be relying on a single biased perspective. Impossible to find a balanced view either in the UK or abroad which means you just have to read across the whole range to be well informed. And that includes reading foreign sources as well as UK.

I would have said a year or two ago that The Guardian & BBC views were extreme (Guardian still is) but they have been joined by Sky. FT was always very remain oriented rather than analytical & The Times very liberal and metrocentric. I'm afraid you'll just have to add The Telegraph.

I'd also advise ignoring all articles that contain 'could' or equivalent in the headline.

PS
There's no such thing as no deal or no brexit.
No deal = negotiations about relationships in the future & no 'everything staying the same' transition period
Deal = negotiations about relationships in the future with the UK position constrained by the WA
No brexit = interminable campaigning for brexit + the UK fighting EU from within

The previous status quo was never stable but there are no ways of returning to it.

CheshireUK

I too have been concerned about the effects of Brexit on my SIPP. I also think it's very hard to predict the way in which the market will react if we do actually leave the EU on the 31st of October. For that reason, I have this week sold all my stocks and am currently in cash, apart from one AIM share that I have held for over 18 months. I accept I may miss a rise, but equally, I will avoid a significant market correction if we have one. As I am in drawdown, for me maintaining value is my primary objective in these turbulent times.

scrooge

One key difference between 2016 Referendum and 2019 Brexit, is that in 2016 there was a quite wide perception that the UK would vote to remain; today few commentators are brave enough to predict what will happen, but Brexit is seen as a real possibility. So I suspect a Brexit is already cooked into both exchange rates and stock markets. Perversely, a clear defeat of Brexit would likely bring significant appreciation of sterling and a knock to the likes of Shell, Spirent and 3i with a large proportion of non-UK earnings.

pka

11th Aug '19

If one can't predict whether or not Brexit will happen, one approach is to have half one's portfolio in companies with solely UK earnings and the other half in companies with mainly non-UK earnings. That way, whatever happens, one half of the portfolio is likely to do well in the short-term whilst the other half doesn't.

William K

Many thanks jmuggleton for that meticulous analysis. I was particularly interested as I either own, or have recently owned, most of the shares you mentioned. My Brexit strategy started three years ago and I put most of my money in the S&P 500 and some global tracker funds in the hope that the USD and other currencies would outperform the GBP. However I still buy some UK based companies. Mission Marketing (LON:TMMG) interests me. I think it's an excellent company and the recent price fall from around 93 pence to 76 pence puzzles me. If it falls any further I might invest despite Brexit. Has a 'no deal' Brexit been priced into the market? Probably. Incidentally I agree with you about macro-economics especially when they impact upon foreign exchange rates. British companie that depend on imports for their products will struggle if the GBP falls another 10% against the USD or Euro.

Westway001

I was also going to sell all my stocks last week for exactly the same reasons before Twitter boy the previous week sent the value down by an average of 6% (in some cases much more). I am hoping for a slight rebound since I cannot presently bear to sell whilst mostly red.

Muggles

Interestingly, I drafted this last weekend before the latest round of sabre rattling, and had exactly the same thought as I read the news. I remember several companies which do business in the US and China talking about the impact it had had so far/could have when I was scanning their risk registers for brexit.

Couldn't agree more. I'm well aware my information sources are biased, and I currently only have time to read from a limited range. Indeed, this is why I specified this up front as while I try to take what I read with a pinch of salt, speaks to my own biases that this is what I choose to read and others will need to factor that in when reading the above.

Good point about appreciation of sterling. It's made me realise an important caveat to this analysis: I've looked at the risk of one of the possible outcomes (no-deal), and not the risks of the alternatives (a deal/brexit being abandoned). It would be easy to assume the risks would be reversed, but I suppose that wouldn't necessarily be the case

DeltaCharlie

An excellent post. While I am certain that Brexit is already priced in it is nevertheless likely that there will be a further short term fall in the pound with the sort of consequences you list. However, I do not think the risk of a McDonnell/Corbyn government which could result, if the continuing intransigence of the EU results in a chaotic November, is fully recognised. Our strategy has been to keep half our money outside the UK and to be well diversified with the rest. I do think however that there is opportunity in under-priced UK companies.

jwebster

12th Aug '19

Personally, I don't think the share market has fully priced in the risk of a hard Brexit. I think the UK Govt. will give hard Brexit a go as they need to win a general election soon, and to win this they need to neutralise the Farage party. I suspect they will call a GE after losing a confidence vote in September, go for a hard Brexit 31 Oct and hold the election soonest first week of November. That means they win back the Farage votes but it's too soon for companies to report their Brexit problems to the public. That's their sweet spot to win a GE. Then they have five years runway. If they win a majority, they will drop the DUP and likely agree a EU trade border in the Irish sea to resolve the Good Friday agreement.

Binary outcomes are difficult to trade. There's always a chance the can gets kicked down the road again.

My view is the objective function of the govt. to hold and win a GE is sufficiently strong to push for a hard Brexit. On that basis I suspect the most likely outcome is some capitulation selling Uk domestic stocks sometime this year.

The opportunity is that sell-offs tend to be broad based and thus miss-pricing occurs. I am holding a list of favourite stocks to buy in that event. Let's see. Tough to call.

timarr

I suspect they will call a GE after losing a confidence vote in September, go for a hard Brexit 31 Oct and hold the election soonest first week of November.

No. The Electoral Registration and Administration Act sets the minimum length of electoral campaign at 5 weeks. Calling an election on the 31st October means an election no sooner than 5th of December. Which means the campaign will be running during the most likely period of serious dislocation. If you're the EU you might take the view that this would be a good opportunity to demonstrate how much leverage you really have. Can you imagine the impact on the campaign if BJ had to ask the French for help to keep food supplies moving?

But it's all speculative - it may not happen, it may happen and pass off smoothly, it might be a capital flight inducing disaster. Or something else. I don't think there's any strategy here that copes with all events. But a balanced portfolio a large slug of cash, some overseas bonds and an equity portfolio consisting mainly of companies with low debt and little fixed UK infrastructure will probably offer some support in either direction.

Parliament return from recess on 4 September, so I'm expecting the call on a GE then, in time for election day first week of November, straight after Brexit date. There have been various reports from Govt. staff on this, so this strategy is being prepared as an option.

Gives BJ rights to win back the Farage Brexit party vote but (he thinks) avoid the noise from companies complaining about duties, queues, paperwork, lost sales etc.

Regardless, agree with your point on a balanced portfolio to weather various possible outcomes. I also own Silver and GDX in the mix, in this regard.

Definitely possible - but assuming a no-confidence vote can be won by remainer MPs that doesn't trigger a GE. It's then in the hands of the winning side to decide what to do - both sides have 14 days to negotiate and try to form an interim government. In that event it's hard to imagine any outcome that gives BJ what he wants. But given the inability of the remain side to agree on anything it's still possible they may fail, the government may fall and the GE then occurs first week in November.

Basically, anything is still possible.

JohnEustace

But the Chinese have just let the yuan fall to the extent that the tarriffs are pretty much cancelled out - at an overall level anyway. Industry specific issues will still be there.

I thought it ironic this got them labelled as currency manipulators because to my mind they just stopped manipulating quite as much as they had been to hold the yuan up..

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Muggles

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