Get set for the Brexit Boom

James Faulkner

In the coming months and years, you will hear lots of headlines saying that the UK economy is doing well in spite of Brexit. The reality is that Britain’s decoupling from the European Union is a catalyst to unleash the potential of the UK economy, which will stand out like a sore thumb against the long and excruciating decline that’s regrettably in store for our continental European friends.

I never understood why the whole Brexit debate in the UK was structured solely around what would happen if we left, without any attention whatsoever being paid to the equally important question of what would happen if we remained. Given that the EU was (and still is) on a path to “ever greater union”, eventually we would have inevitably been drawn into the financial quagmire that has resulted from the fiscal union of countries as diverse as Germany and Greece. This was point was never fully addressed by the remainers.

But, happily, we are now breaking free from our EU shackles and Britain’s centre of economic gravity will shift away from Europe. As it does so, the things that have made the UK economy more resilient than its continental counterparts over recent years – a flexible labour market, a vibrant university sector, a global financial hub in London, and a great business environment – will continue to serve us well and act as a beacon for investment, not least from non-European countries looking for a business-friendly place to access the European market, but also from European investors looking to reduce their exposure to their domestic market.

Research from the Centre for Economics and Business Research (CEBR) shows that the French economy failed to overtake that of the UK despite all the Brexit travails, and what’s more Britain looks set to continue to pull away from its old rival, to be around a quarter larger by 2034.

Indeed, barring a global downturn and stock market crash, the UK market could be on the cusp of an exciting bull run. Plagued by Brexit uncertainty over recent years, UK stock market valuations are amongst the lowest in the developed world and offer an interesting investment proposition to those willing to take a long-term view. As Britain re-establishes its economic credentials in the wake of Brexit, this valuation gap is likely to be eliminated as money flows back into the UK.

With some fund managers claiming that UK stocks are the cheapest they’ve been since the 1970s, there is plenty to go at in the UK market for value-seekers. What’s more, foreign buyers are poring over the UK market looking for companies they can acquire on the cheap. Britain is one of the easiest places in the world to conduct M&A (mergers and acquisitions) activity, and I wouldn’t be surprised if we see activity pick up now that we have some kind of resolution in sight for Brexit.

But it won’t be quite as easy as buying anything you can get your hands on and just waiting for it to go up. In fact, some UK-listed stocks will face headwinds, as those with significant overseas earnings could very well see the value of those earnings decline in sterling terms should the pound continue to recover on international currency markets.

It is the domestically focused stocks that stand to recover the most on the back of a positive outcome for Brexit, particularly as these were the stocks that felt the pinch on the back of the vote back in 2016. One sector that has been particularly out of favour of late is the property sector. You can pick up REITs (real estate investment trusts) like British Land (LON:BLND) on a 30% discount to NAV (net asset value) with a 5.5% dividend yield. Stocks like this should be doubly attractive to overseas investors, as they get the triple whammy of appreciation from the narrowing of the discount, the recovery in underlying property values and the rise in the value of sterling.

Meanwhile, another area that is sure to receive a lot of attention under a Boris government is infrastructure. Hill & Smith (LON:HILS) is by no means a household name, but it makes many of the safety barriers used in our road systems. Its products will no doubt be in demand as Boris promises to “scale up” the regions. Another one that may be of interest from an infrastructure perspective is Tracsis (LON:TRCS), which provides IT systems for rail management and monitoring.

If there’s anything you can count on these days, it’s that the ‘experts’ will get it wrong time and again: they thought Trump’s election would crash the stock market – they were wrong; they thought the Brexit vote would topple the housing market and push us into recession – it didn’t; and they think that the UK will be worse off outside the EU than within it – it won’t. It’s time to back Britain!

Disclaimer: none of the information in this article should be considered financial advice. If in doubt, seek the services of a registered financial adviser.


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