2

OCT
2018

Ready for Brexit related opportunities?

 

The UK Parliament is nearing the end of its discussions over Brexit where Theresa May’s minority government will be expected to pass a mountain of legislation to ensure a good deal for the UK. While this was set to be done on September 20th, May’s ‘Chequers plan’ was shot down by EU leaders with a deal now appearing some way off. 


This uncertainty leaves the FTSE 100 open to potential increased volatility, but with that, potential opportunities 


Short and Long leveraged ETPs can be used as tactical short term trading products to magnify the returns on movements of the FTSE 100. According to an article from the FT Brexit has so far boosted trading volumes in both ETFs and short and long leveraged ETPs; they both spiked following the Brexit vote. They enable investors to make the most of the waves of volatility that are likely to emanate from the forthcoming Brexit negotiations, as well as the ability to offer to protect their portfolios.

 

To date there appear to have only been a handful of things provisionally agreed upon, namely how much the UK owes the EU, and what will happen to UK citizens living in the EU and vice versa. However, a deal – and getting it through Parliament - needs to happen before 11pm on 29th March next year when the UK will officially leave the European Union and while there is an agreed 21 month transition period (to the end of December 2020), this date will continue to be the main focus of Brexit negotiations. 

 

While there is a concern that a deal won’t be met before the deadline, it is also unclear that if it a deal is agreed upon whether it will be a ‘hard’ or ‘soft’ one. This could mean  a lot of uncertainty for onlookers and investors and this uncertainty and potential volatility could present an opportunity for day traders.

 
Since the Brexit vote in June 2016, the FTSE 100 hasn’t reacted particularly negatively to any announcements in relation to it

 

In fact, the FTSE 100 has risen 22% since June 24th 2016 to 21st September 2018. There are two reasons for this and they are linked. The first is that the FTSE 100 is made up of large multinational companies that have overseas business. The second is that sterling has weakened since the referendum. The sterling to Euro rate has dropped from 1.23 in June 2016 to 1.11 (at the time of writing). Against the US dollar it’s a similar story falling from 1.37 to 1.31. These factors mean that profits overseas are worth more when changed back into sterling. According to Ed Bowsher at The FT, “around two-thirds of Footsie revenues and profits are earned overseas”.

 
However, historical movements are not a sign of future performance

 

And there are several events still to happen before Brexit is a done deal. According to the UK Parliament site October heralds the end of UK-EU negotiations on withdrawal and a draft agreement should be published. The ‘Withdrawal Agreement’ should be drafted and a political declaration on the ‘framework for the future relationship’ should also be laid out – if this deal is not met it will be pushed to 13th December. By November an agreement in principle in the European Council and request for European Parliament consent are also to be done. 


Between November and January next year the Withdrawal Agreement and Implementation Bill are to be introduced to the House of Commons (the vote on second reading to be a de facto second ’meaningful vote’). By March this Bill is intended to be passed. These are just a handful of things that need to be completed by January next year, all of which remain uncertain at this late stage. 

 

To view the range of Societe Generale FTSE linked, leveraged ETP’s, you can click here

Remember, as with most investments, the value can go down as well as up, and as a leveraged investment these products are designed for sophisticated investors, so if in doubt, seek advice.

 

Post by: Zak de Mariveles, Head of UK Exchange Traded Products


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Brexit ETPs European Union day traders FTSE 100 volatility

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