A familiar theme returned to the UK stock market this week as a stumble for Brexit talks hit the value of the pound and shifted blue chip shares a little higher.

There had been hopes that a deal could be struck this weekend between the UK and EU on their trading relationship after the transition period ends on 31 January, but talks have continued into a new week with both sides signalling pessimism that remaining obstacles can be cleared.

The sticking points in negotiations remain fishing and the nebulous area of the ‘level playing field’ - which means rules governing how much each side can diverge from one another in the future when it comes to support for their domestic industries. 

The market of late has tuned out of the day-to-day developments in Brexit talks assuming, perhaps correctly, that the noises coming from each camp mean little at this stage. Nothing is agreed until everything is agreed and there remains enough time for last minute objections to be overcome. 

Movements in the value of the pound today, however, signal that investors really do see the next week as crucial. The pound fell by more than 1% against both the euro and dollar as the risk of ‘no deal’ grew and markets began to assume a damaging hit to the UK economy. As a result, the large multi-national companies in the FTSE 100, which derive much of their earnings overseas, saw a share price boost because a weaker pound makes their shares look more attractive.

This recalls market movements in the months following the Brexit referendum in 2016, when any bad news for the UK’s deal with the EU pushed sterling lower and produced this same mathematical boost for the Footsie’s foreign earning companies.

Meanwhile, smaller UK companies appear more exposed to the hit from no deal and the index for smaller companies, the FTSE Small Cap, suffered a mild fall yesterday.

In short, the market is beginning to take notice of Brexit again and is likely to reflect the ups and downs of negotiations in the coming days.

Among the worst hit sectors today have been housebuilders, with Berkeley Group, Persimmon, Crest Nicholson and Barratt Developments all featuring in the list of biggest fallers and posting losses of around 5% or more. News that some building materials are being held up at UK ports - a situation that may get worse if no deal is found - has added to their woes.

For UK investors, Brexit uncertainty only adds to a complicated picture for shares. The UK remains undervalued versus other markets, particularly the US, and its domestic companies look well placed if the vaccine can lead quickly to an end of lockdown and better economic performance. Brexit clearly represents a risk to that domestic recovery.

It remains prudent to hold a mix of both domestic and internationally-focused UK assets, and a balance of both large and small companies, as a way to hedge out some of the risk currently facing the UK. 

It would also be wise to keep your UK allocation in correct proportion so that they are not over-exposed. The UK stock market accounts for now more than around 5% of the global market (depending on which index you look at), which should act as a guide to how much exposure investors should own.

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