Brexit deal sparks gains for assets and the pound but issues remain

It might be too early for investors in UK financial assets to celebrate

Brexit deal sparks gains for assets and the pound but issues remain
Steve Randall

Canadian investors who hold UK financial assets or pound sterling start Thursday with some good news.

A new Brexit deal has been agreed in principle between the UK and EU, sparking a rise in the pound while the FTSE 100 stock market index surged more than 40% in morning trading.

The deal was announced early Thursday with British prime minister Boris Johnson tweeting ““We've got a great new deal that takes back control.” Meanwhile, EU Commission President Jean-Claude Juncker hailed it as a “fair and balanced” agreement.

Nigel Green, CEO of global investment advisory firm deVere, says market sentiment is high.

“The pound has soared above $1.29 for the first time since May on reports that a Brexit deal has been reached and UK stocks are boosted in a relief rally,” he said. “However, the rally is currently being tempered as it needs to get through the UK and EU parliaments.”

The champagne will remain on ice for now unless the deal can get the backing of the EU parliament, which is considered likely; and the UK parliament, which may be a larger challenge for a government without a working majority and its Northern Ireland partners (DUP) dismissing the deal.

“There does seem to be some question marks remaining over the DUP’s support, which is, of course, critical to getting the deal through the House of Commons,” added Green. “That said, there does seem to be a growing sense of optimism that it can get approved.”

Load up on the pound?

So, should investors be buying the pound ahead of Saturday’s UK parliamentary vote?

“If this deal is ratified, we can expect the pound to jump sharply.  It is likely to hit at least $1.35 as the prospect of a no-deal, and/or months of further uncertainty ends,” said Green. “Sentiment towards UK stocks will also rally, particularly given the attractive valuations of many UK companies.”

He added that UK-based exporters will lose out though as their earnings are in dollars, euros, and other currencies, which will be weaker.

Mr Green also noted that investors should remember that if the withdrawal agreement is agreed by both parliaments, there is still a long way to go; the deal is only about how the UK leaves the EU, it is not a trade deal.

"As such, investors need to protect themselves from market uncertainty and also best-position themselves for the inevitable opportunities through exposure to a broad range of assets, currencies and geographic regions," he advised.