UK Stocks Look Past the Brexit Fog

A number of stories have dominated headlines over the past week, from the US-China trade tango and Middle East tensions to the prospect of an all-English Champions League final and the afterglow surrounding Royal Baby Archie. Lost in the hubbub: The ONS confirmed Q1 UK GDP expanded. In our view, this is yet another example of how stocks move ahead of economic data and discount widely expected events—crucial for investors to keep in mind. 

Q1 UK GDP grew 0.5% q/q (2.0% annualized), with the services sector, which comprises nearly 80% of UK GDP, up 0.3% q/q. However, the industrial sector’s pickup—led by manufacturing’s 2.2% growth—got a lot of attention. As the ONS highlighted, “The strong growth in manufacturing is consistent with an increase in activity ahead of the UK’s originally intended departure date from the European Union, but we were unable to quantify the effect of this.” Said more directly: Businesses seem to have been front-running the original March 29 Brexit date, boosting activity. That is consistent with other recent data. For example, IHS Markit/CIPS manufacturing purchasing managers’ index (PMI) has ticked up recently due to businesses’ building up inventory ahead of a potential no-deal Brexit—which didn’t happen.

Other GDP components pointed to Brexit-influenced activity, too. Household consumption rose 0.7% q/q, the fastest pace since Q1 2017. This broader measure of consumer spending supports our musing last month that March’s retail sales pop perhaps reflected UK shoppers’ stocking up on goods ahead of March 29. Q1 imports rose a brisk 6.8% q/q, while exports were flat. Underpinning imports’ rise: an 11.0% increase in goods, impacted by the volatile “unspecified goods” category in January—perhaps also capturing UK businesses and individuals acting before the then-Brexit date.

We aren’t calling this report a whopping positive. It is growth, and growth is growth. But if the deadline frenzy merely pulled demand forward, that likely speaks to some stumbles later this year. Similarly, we don’t recommend shouting from the rooftops about business investment’s 0.5% q/q rise, which snapped a year-long losing streak. It, too, could be evidence of stockpiling for an event that never came, with a hangover looming. Lingering Brexit uncertainty could also continue weighing on risk-taking.

Yet this isn’t exactly breaking news for stocks. In our view, markets are efficient discounters of all widely known information. With all the surrounding analysis, speculation and chatter, Brexit is the epitome of something “widely known.” Markets price in those opinions, projections and information, which saps surprise power. Though pundits fixate on every Brexit gyration and development—and there are many—UK stocks have been more or less in line with global stocks since last September. (Exhibit 1) Sometimes ahead, sometimes behind, but with no discernable trend. Whatever noise and disruptions economic data hint at, stocks seemingly already moved on.

Exhibit 1: UK Stocks Moving On From Brexit?

Source: FactSet, as of 5/14/2019. MSCI UK Investable Market Index (IMI) return with gross dividends and MSCI World Index return with net dividends, GBP, 5/11/2018 – 5/10/2019.

When in doubt, we think investors should trust the market. The wisdom of crowds cuts through the noise better than any single expert or pundit. Though stocks can be volatile in the short term, they weigh the fundamentals over the longer term. Overall, markets recognize the UK’s underlying economic drivers remain solid, with its robust services industries chugging along—even if Brexit uncertainty and inventory overhang cause some tug-of-war in the coming months. Forward-looking stocks likely anticipate this and see through these wrinkles fairly efficiently. Though Brexit uncertainty remains a lingering headwind, it needn’t imperil stocks. We believe UK stocks are poised to continue rising alongside the global bull market.