With the United Kingdom’s decisive general election result in December 2019, the Brexit issue which has dominated national life there since early 2016 appears to finally have been settled. This may or may not be so, but what comes next may prove advantageous for opportunistic investors.
Opportunities to take advantage of the Brexit issue have existed for investors since June 24, 2016 when the referendum vote result was announced. The result confirmed that of the 72% of the U.K. electorate that voted, a slender majority of 52% had declared that they wanted Britain to exit from the European Union (hence the term ‘Brexit’ – a portmanteau of ‘Britain’ and ‘exit’).
David Cameron, who campaigned to stay in the E.U., resigned when the referendum outcome was in favor of leaving. Image provided by the Daily Mirror.
The immediate consequences of the referendum decision itself were sharp. First was the resignation of then-Prime Minister David Cameron, who had backed staying in the EU and called the referendum to quell both the Euroskeptics in his Conservative Party and the rise of the UK Independence Party, a far-right movement which proposed limiting immigration and campaigned to leave the EU to achieve this proposal. The result of the referendum went against Cameron, however, as he acknowledged in his resignation speech on the morning the referendum result was announced:
…the British people made a different decision to take a different path. As such I think the country requires fresh leadership to take it in this direction.
The second immediate consequence was the fall of the British Pound Sterling, the UK currency which is represented by the CurrencyShares British Pound Sterling Trust ETF (FXB). Sterling sank 8.15% against the dollar in the aftermath of the Brexit referendum result, its lowest level in 20 years, and it has never risen to its pre-2016 level since then.
The British Pound Sterling fell 8.15% against the dollar in the aftermath of the Brexit referendum result being announced. Chart provided by QuoteMedia.
As the dust began to settle, it seemed that the possibility of Brexit being viably implemented was remote, given the costs that the UK would incur. For a while the UK as a whole voted by a slender majority to leave, two of its four constituent countries, Scotland and Northern Ireland, voted to remain in the EU: Scotland with a majority of 62%, and Northern Ireland with a majority of 55%.
These factors have caused problems relating to the cohesion of the U.K. going forward, as Scotland had voted in an independence referendum in 2014 to remain part of the U.K. chiefly so that it could avail of continuing E.U. membership. Brexit undermined the premise of that decision, and Scottish First Minister Nicola Sturgeon stated at the time that the independence issue would be reviewed if Scotland “was taken out of the EU against our will.”
The case of Northern Ireland is considerably more contentious. The troubled region has had relative peace and stability since the signing of the 1998 Good Friday Agreement, which allowed for a power-sharing arrangement between the majority Protestant Unionist community (who self-identify as British) and the minority Catholic Nationalist community (who self-identify as Irish). This power-sharing arrangement is enshrined by the European Court of Human Rights, and effectively dismantled the previous system of discrimination which was the fuel for the decades-long violence that plagued the region.
The border between Northern Ireland and the Republic of Ireland has become a political and economic issue due to Brexit. Image provided by the Daily Express.
Brexit has imperiled that arrangement, as once the U.K. leaves the E.U., Northern Ireland will also leave, and the European Human Rights law which has underpinned its peace process will be stripped away. The door to the violence of the past will therefore be re-opened, which is obviously bad enough. In addition to that are the economic consequences: cross-border co-operation between Northern Ireland and the Republic of Ireland affects every aspect of the economy, from the people who cross the border to work, to the regional bodies that work on improving infrastructure on both sides of the border, to the businesses that trade on either side of the border with ease.
Brexit will imperil all of this as well. The Republic of Ireland is an EU member state, and for the U.K. – including Northern Ireland – to divorce itself from the E.U. could lead to a hard border being imposed. This is what the proposed backstop – a temporary arrangement that would keep the U.K. in the E.U. customs union until a workable solution to the border issue was found – was formulated to alleviate. However, if the U.K. leave without a deal, – a hard Brexit – then a hard border will prove unavoidable.
Getting a deal worked out has proven to be beyond the ability of the British government. Despite the efforts of Cameron’s successor, Theresa May, and the efforts of her own successor, Boris Johnson, to suggest otherwise, blame for the lack of progress on a Brexit deal cannot be laid at the feet of the E.U. The situation was perfectly summarized in July 2018 by Jonathan Lis, a policy director of the think-tank British Influence. In July 2018, he wrote the following in Prospect Magazine:
Nothing-not a single thing-has worked out as the prime minister planned or promised. The recent June summit, which many once expected to produce the flesh and bones of the final deal and future direction, ended in deadlock. The trade deal has not only not been agreed, but preliminary negotiations have not even begun. This is not slacking or heel-dragging on the part of the EU. It is because the UK government, more than two years after the referendum and less than four months before the deadline, has still not agreed its initial position. The chaos cannot be overstated.
That chaos, a consequence of a deadlocked parliament which left the Conservatives presiding over a minority government, proved too much for many businesses with operations in the U.K., which chose to relocate elsewhere in the E.U. Specifically, the Republic of Ireland has benefited from this state of affairs as a number of global businesses require an English-speaking gateway into the E.U. market – a role which London will forfeit as a consequence of Brexit. Citigroup (C) moved 900 jobs from London to Dublin, British lender Barclays (BCS) sought out more office space in Dublin for the explicitly-stated purpose of coping with the post-Brexit fallout, and the Bank of America (BAC) stated that Dublin would serve as their EU hub post-Brexit.
The December 2019 general election in the U.K. gave Boris Johnson a large parliamentary majority. Image provided by The Middletown Press.
With the U.K. general election result on December 2019, which gave Prime Minister Boris Johnson an overwhelming majority in the House of Commons, the parliamentary deadlock appeared broken and the U.K. appears on course to leave the E.U. by the end of this month. However, that does not mean that the aforementioned chaos will abate. Trading relations will largely remain as they are for the rest of 2020, but if trading problems arise – either with the E.U. or anyone else – the U.K. will be on its own in attempting to resolve them.
This is problematic as the U.K. still has to figure out what regulatory basis its economy will have going forward. If it cannot do this, then one of two things will happen: either it will extend its departure from the E.U. (which the E.U. is loath to agree to), or it will operate on the terms of the World Trade Organization. This exacerbates the sense of uncertainty for businesses operating in the U.K. and will lead to further departures and less investment. Having to prepare for either a free trade agreement, WTO terms, or no change is a lot to ask of the business community, so opting for a more certain environment is likely. Suffice to say, this ensures that the Pound Sterling will remain at the lows it has bobbed around at since June 2016. And the problems surrounding Northern Ireland and Scotland – outlined at length above – will remain huge issues in the year ahead.
So, for a prospective investor, what does all of this mean? A weakened British Pound, combined with the bearishness towards the U.K. market, means that Brexit provides opportunities to invest in British companies that have international operations and thus are not dependent on the U.K. alone for their profits.
GlaxoSmithKline (GSK), which I recently covered, is essentially the British version of Johnson & Johnson, and is the ninth-largest pharmaceutical firm in the world by market capitalization. It could prove an excellent investment for income investors with its 4%+ dividend yield. Another prospective income investment is also one I recently wrote about, British Telecom (OTCPK:BTGOF), the U.K.’s dominant telecommunications player, which currently sports a 7%+ dividend yield. These are but two examples of prospective value investments that investors can avail of in the wake of Brexit.
In summary, Brexit has been anything but a positive for the U.K. in the three-and-a-half years since the referendum result was announced. The ongoing inability of the British government to get a concrete deal done, the issues with Scotland and Northern Ireland, the uncertain business climate which has led to several firms relocating, the fall in value of the Pound Sterling – all of these can hardly be considered positive achievements. For investors seeking value investments, however, Brexit has provided opportunities which may prove fruitful going forward.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.