What investors should do as UK triggers Article 50

There's real concern about UK equities as Theresa May starts the clock on two years of tough negotiations with Europe. DeVere Group strategist Tom Elliott tells us what to do.

How do you think equity markets will react when the UK triggers Article 50 on 29th March?

I believe once Article 50 is struck the UK stockmarket won't do anything. Investors are quite sanguine and they believe the effects of Brexit are probably priced in. They believe they know what Theresa May says, when she wants a "clean Brexit".

I beg to differ I think it's much more of a complicated process than investors believe, this will become apparent over the ensuing months and then, I suspect, investors will want to take a more cautious approach on UK stocks, particularly mid and small-cap stocks that are more biased/more focused towards the UK domestic economy.

How do you think they should react?

With extreme caution, because I do believe that we are going to see problems arising as the UK government tries to launch negotiations (trading arrangements) with the EU once we have left the EU, at the same time as they conduct the Brexit negotiations. 

The Europeans are adamant they do not want to do this. They want the talks sequentially and I think we are going to see a lot of argument and confusion as to the negotiating position of the UK vis-a-vis the EU, and would/should scare investors because, if worse comes to worse, we will leave the EU in two years' time with no trading arrangement with the EU which, after all, is 50% of our export market.

Will the pound fall much further over the next few days, weeks and months, or is this a buying opportunity?

I expect sterling to fall on three traditional measures of currencies. We can see that sterling should weaken a bit, we still have a very large current account deficit - growth I think will slow as increasing inflation will hit real wages and lessen consumer spending growth - and, finally, we have interest rate differentials, particularly against the US where the Fed is raising rates and the Bank of England will keep rates the same, at least to the middle of next year. And then throw in the whole Brexit negotiation problem, that I think will be a problem, and I can see strerling weaken from here, perhaps to the $1.10 level  or even perhaps below by the end of the year.

Is the post-referendum, post-Trump stockmarket rally unravelling, or is this a buying opportunity?

It's too early to know if the recent weakness in US and global stockmarkets is a buying opportunity. We are just seeing problems facing Trump's attempts to form ObamaCare and analysts fear that these will mirror forthcoming attempts to reform tax and get through infrastructure spending. 

I think it is much too early to know what will happen. I look at the strong data coming through the US economy, improving corporate earnings, all of which is supportive of stockmarkets. And against that environment I'm more inclined to think that the negative news we are seeing from Washington is just day-to-day politics, and I am focusing more on the good news coming from corporate America and through earnings growth.

Click here to watch the full video with DeVere Group's Tom Elliott.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.