Mark Lister: Brexit of little consequence for lacklustre British market

British Prime Minister David Cameron. Photo / AP

Opinion

Mark Lister is head of private wealth research at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on craigsip.com. This column is general in nature and should not be regarded as specific investment advice.

New Zealanders have always had strong affiliations with the UK, and investors are no different.

Many still have money over there long after they've arrived in New Zealand, sitting in pounds earning next to nothing, or invested in various UK funds and shares.

Consequently, the upcoming "Brexit" referendum on European Union (EU) membership is quite relevant for a lot of Kiwis. However, I find it hard to get excited about the UK as a place to invest, regardless of whether they stay or go.

The UK sharemarket has been terrible for a long time. Over the last 10 years it has delivered an almost non-existent return of 0.4 per cent per annum.

This is well below the other major markets around the world, such as the US, Europe or Australia, and certainly New Zealand.

Investing 1.00 in UK shares in 2006 would have netted a whopping 1.04 today. By comparison, the US market would've turned US$1.00 into US$1.58, while in the local market one New Zealand dollar would've grown to $1.95.

There are a few reasons why the UK has been so average. The economy continues to stumble along at best, while the market is dominated by big oil companies, mining stocks and banks.

None of these sectors have been great places to invest in recent years, and that doesn't look like changing over the next few either.

The currency has been reflecting this economic malaise, with the pound hitting the lowest level since 2009 against the US dollar earlier this year. The NZ dollar is well off its 2013 highs of 0.56 against the pound, but at 0.47 it is still much higher than the 0.35 average that prevailed until about 2009.

For those people waiting for the exchange rate to go "back to normal", there isn't much hope on the horizon. The UK has a high current account deficit, high levels of government and private sector debt, and is very reliant on foreign capital.

Brexit or not, these challenges will keep UK interest rates and the pound low for the foreseeable future.

The Brexit decision will definitely be a close one, despite most strategists picking the UK to remain when it comes to the crunch. This is far from a given, and it wouldn't take much to sway the electorate.

Ironically, while there are many negative economic consequences associated with a Brexit scenario, there could be little long-term impact on the UK sharemarket. It is dominated by global multinationals that only have a modest underlying exposure to the UK.

The pound, however, will be much more sensitive to the outcome. A vote to leave would worry investors and see the currency sold down further.

On the other hand, should the UK elect to remain in the EU, we might see a strong relief rally in the pound, as the market unwinds some of the recent uncertainty. Maybe some investors should use that rebound to give up on it once and for all.

If they choose to persevere, in five years' time they might still be patiently waiting for the pound to get back to 3-1 against the Kiwi dollar while the world continues to pass them by.

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