Whether Britain leaves the European Union with or without a deal will have a big impact on potential returns for investors,
The impasse between Britain and the EU on the withdrawal agreement was broken this week as the two sides tried to reach common groundbut with many aspects still to be negotiated, a deal is far from certain.
Below, Telegraph Money highlights stocks and funds that should do well if there is an agreement, or there is a no-deal Brexit.
Where to invest if there is a deal
For many international investors Brexit makes Britain an unattractive home for investment as the risk of volatile movements in the poundis a roll of the dice they would rather avoid.
As we have seen previously, good news surrounding a deal has caused the pound to rise, while negative conversations have led to a falland this is a key consideration when making investment decisions.
Laith Khalaf of fund shop AJ Bell saida resolution to Brexit should bring an end to thedramatic currency fluctuations.However, a rise in the pound would impact companies that earn large chunks of their earningsoverseas, as these will fall in sterling terms.
“As a result, companies that have little overseas earnings and are plugged into the British economy are likely to see share price gains on the back of a deal,” he said.
“Value” stocks – those that are cheap but could rebound – should do well. Domestic banks for example would be among the most sensitive to any trade deal with the EU.
Leaving with a deal would lessenthe risk of negative interest rates, which mayhave been used if the British economy tanked following Brexit. Of course, rate changes may be deemed necessary in the economic response to the pandemic, too.
The amount of profit banks make on loans are directly related to interest rates, so any removal of the threat of negative rates, or even the potential for rates to rise, would boost margins.
Domestic banking group Lloyds could be one of the biggest beneficiaries. Its share price hasstruggled this year, down 41pc, as the Bank of England has put the brakes on British banks paying dividends until the coronavirus pandemic is over. “When this is lifted it is likely to be a further boost for Lloyds shares,” said Mr Khalaf.
Housebuilders Persimmon, Barratt Developments and Bellway could all also be in line for a share price boost, their prices are also deflated.
For those unwilling to pick out individual companies, there are many funds that specialise in investing in these types of companies.
Kamal Warraich of Canaccord Genuity Wealth Management said: “We like Fidelity Special Situations managed by Alex Wright, who seeks opportunities where there is a catalyst for change.”
For those that prefer investment trusts, the Mercantile Investment Trust managed by JP Morgan invests in companies with a high proportion of revenue earned in sterling, which has seen it become correlated to the ebbs and flows of Brexit news.
A third option would be a smaller companies fund. These stockstend to be more domestically focused and should do well. Slater Growth buys fast growing companies but typically looks down the market to smaller and medium-sized firms which have been hit hard by both the pandemic and Brexit, but could recover strongly if a deal is reached.
Where to invest if there is no deal
The opposite is true if there is a no deal. In this scenario, the pound will likely weaken against the euro and dollar. Although this would normally be a positive, as it would make British companies cheap to overseas investors, the uncertainty it would bring is likely to put off would-be investors.
Simon McGarry of Canaccord Genuity said in this case, it would make sense to own companies that derive a lot of their earnings from overseas, as these will be worth more if the pound falls in value.
He highlighted pharmaceuticals giants AstraZeneca and GlaxoSmithKline, miners BHP and Rio Tinto and consumer staples Unilever, Diageo and Reckitt Benckiser as likely to benefit from a fall in the pound.
For fund investors, Nick Wood, of Quilter Cheviot, said those that want to buy British should consider Lindsell Train UK Equity. The fund invests in “exceptional” companies, generally with a bias towards exporters such as Diageo and Unilever.
Mr Warraich added that ignoring Britain altogether would make sense, as global stocks would likely fare better in the short term. Fundsmith Equity and Scottish Mortgage Investment Trust are both global funds thathave significant exposure to America and therefore the US dollar.
Should you invest based on Brexit?
While these impacts will likely have big implications for your portfolio in the short term, positioning your entire portfolio one way or the other before any Brexit announcement, means investors are taking a big punt on the political outcome that no-one can truly predict.
If you are planning to invest after an announcement, it is important to remember that markets will quickly price in any news on the Brexit negotiations, so you may miss out on short term gains.
Mr Khalaf said: “It’s better therefore to have a mix of investments, so that some will do well in either scenario and to think long term, making sure not to take undue risks on unpredictable political machinations.”
