1. What has the Brexit deal changed for UK equities?
Adrian Frost, Nick Shenton and Andrew Marsh, Artemis Income Fund:
We would look at the Brexit agreement from two perspectives. First, over the coming months and years there are bound to be recurrent disruptions, disputes, discussions and compromises as some aspects of the deal – foreseen and unforeseen – are ironed out. In our view, this may give rise to the occasional bout of stock or sector risk, albeit that this is likely to be short-term in nature. In general, it is difficult to see any significant parts of the UK market that would be impacted by this. It is worth saying that Brexit is commonly discussed in the context of downside risk. But there may be some areas where the agreement unlocks greater opportunity.
More important is that the agreement removes the barrier to allocating flows to the UK market. We are now on a more level playing field with other equity markets. This reappraisal of the UK market will take time but, interestingly, with £47bn of UK companies taken over in 2020 some are in more of a hurry!
The portfolio is positioned to benefit from the total return that accrues from long-term cash flows which are attractively valued. In other words, we have not made any radical changes pre and post the agreement.
Ed Legget and Ambrose Faulks, Artemis UK Select Fund:
It has brought more clarity. The removal of the cliff-edge, no-deal Brexit has taken away the market’s greatest fears. The muted share price reaction since is due to concerns over the UK’s third major lockdown. And therein lies the rub: Covid substantially trumps Brexit.
It will take some time to discover the true economic cost of leaving the EU. Some sectors will see little change – albeit many sectors have ‘phase-ins’ – and others will face more customs declarations. The list of unknowns reduced rapidly and we would expect a high degree of automation to come shortly. If that were the sole upside to leaving, you might very well question why the UK voted to leave.
We would posit a quick thought: remaining in the EU would have meant we joined the EU’s vaccine purchasing schedule. Limited pre-purchasing has led to a slower roll-out than elsewhere and shown that one size does not necessarily fit all. Finally, since the start of 2016 (referendum year) to November 2020, the UK market saw just shy of £120bn outflows from global investors. Could a reversal be on the cards?
Derek Stuart, Artemis UK Special Situations Fund:
The main effect of the Brexit deal is to remove another obstacle for investors to invest in the UK stock market. While we do not yet know all the details or implications of the deal, the threat of a ‘no-deal’ was still very real in the minds of many investors. Given the political and Brexit noise over the past few years, investors have been reluctant to invest here.
This has left the UK market as one of the cheapest globally, at a time when a majority of asset allocators have very modest weightings to the UK. This valuation is already being recognised by corporates and private equity, with acquisitions of UK companies accelerating into the year end. We expect that to remain a feature in 2021.
2. Which sectors are likely to undergo most change in 2021?
Income:
The UK market will benefit from any reflation trade, given its value tilt. Financials and commodities would be obvious beneficiaries. Financials exhibited resilience in late 2020 as fears of delinquencies faded, along with pressures on net interest margins. We expect this resilience to become an attraction as investors rotate away from other parts of the market – and we envisage the resumption of dividends in 2021.
