The U.K. is making real progress in its negotiations to exit the European Union, and its progress toward a successful Brexit presents an opportunity for savvy investors to get in on the action.
U.K. Prime Minister Theresa May struck a deal with the European Union that allows the country to start the next stage of talks about future post-Brexit trade deals. It comes after a year and a half of tough talk from both sides.
The recent agreement allows EU and U.K. citizens who are already established in the other’s territory to continue living there. There is agreement that the amount for the divorce bill is around 50 billion pounds ($67 billion.) There is also agreement on how to deal with the land border between Northern Ireland and the Republic of Ireland.
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“The impression I have is that the U.K. isn’t getting a bargain,” says Ivo Pezzuto, professor of global economics at the ISM Global Business School in Paris. “The U.K. just didn’t want to have no deal.”
The understanding may pave the way for Britain to cut a deal such as Norway has, which allows free trade with the EU. However, there are other alternatives such a replicating the arrangement Canada has or that through which Switzerland operates. Of course, the country could decide to rekindle its trading past with nations that are members of the so-called Commonwealth.
Exactly, how Brexit turns out is still unclear in large part because there are varying views within the government of what makes the most sense.
The pound is still struggling. Some global investors are still likely fearful of what may happen to the British economy as it exits the EU. The currency markets seem to indicate that’s what’s happening. Right before the mid- 2016 Brexit referendum, a pound would fetch around $1.46 versus $1.34 recently. The pound initially fell much further, to approximately $1.21 as investors fled the currency. The partial recovery suggests that some of the fear has dissipated.
“I think this fear thing is unfounded,” says Adam Johnson, editor of the Bullseye Brief newsletter. “Ultimately, the U.K. is better off without EU.”
He also notes that the still-reduced value of the pound means that non-U.K. investors can invest while the dollar prices of the stocks are still low.
He’s not the only markets expert to see opportunity.
“The agreement means there is less uncertainty now, so this is good news,” says Oliver Brennan, senior macro strategist at TS Lombard in London. Because investors hate uncertainty, anything reducing it is better for the market.
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He also points out that, contrary to what some had feared, the U.K. economy hasn’t disintegrated into nothingness since the Brexit vote. “U.K. growth is good with close to full employment,” he says. “It is not exactly a weak economy.”
Take the FTSE 250 over the FTSE 100. Brennan says it is time to consider stocks that benefit from the robust British economy. That isn’t the stocks of the well-known FTSE 100 index because it is made up mainly of massive global stocks that do well when the world economy is rocking along.
Instead, focus on the companies in the FTSE 250, which has more U.K. domestic-focused companies such as electronics retailer Dixon’s Carphone, postal service company Royal Mail, and real estate website Rightmove. Such companies may not be familiar to U.S. investors, but they are big names in Britain.
“The FTSE 250 gives you more exposure to the U.K. market,” he says and adds that it is outperforming the index of large stocks. The FTSE 250 gained 13.5 percent this year versus the FTSE 100 that added 7.9 percent, according to data from the London Stock Exchange.
“Overall, it seems like a good time to buy,” he says.
The three stocks mentioned above all are listed on U.K. stock markets, and also listed on the over-the-counter U.S. market. But the U.S. listed market versions tend to have light trading volume. Low volume typically results in wider bid-ask spreads and hence it is costlier to buy and sell shares than it would be going directly to the U.K. markets. On the other hand, buying stocks directly from the U.K. market may involve some additional administration for U.S.-based people.
How to invest. An exchange-traded fund that fits the bill is the iShares MSCI United Kingdom Small-Cap (ticker: EWUS) It has annual expenses of 0.59 percent or $59 per $10,000 invested annually. Rightmove shares are one of the fund’s top 25 holdings.
[See: The 10 Best European Stock ETFs on the Market.]
Because the fund is U.S.-listed, investors can buy it using U.S. dollars. However, if you do this, you will still be exposed to changes in the value of the British pound relative to the greenback. That can make buying the fund riskier in both a positive and negative way.
For instance, if the pound gains value against the dollar while the U.K. market rallies, you’ll do extra well. However, a sag in the pound versus the dollar could wipe out all the gains from the stocks held in the fund. Or worse still, the U.K. market could fall along with the British pound.
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U.K. Deal With the EU May Help British Stocks originally appeared on usnews.com
