Deal or no deal?

Nick Sudbury looks at some of the investment trusts with most to gain if we get a Brexit deal by the Prime Minister’s 15 October deadline.

Remember 2019 when all the talk was about Brexit? It seems like a lifetime ago yet it is less than 12 months since Boris Johnson won a clear majority in the general election to take us out of the EU under the revised terms of the withdrawal bill that he had negotiated.

Back then the idea of being told to work from home, or wear a face mask when you go out and stay two meters apart would have been preposterous, but a lot has happened since the advent of the coronavirus. Yet the trade deal negotiations have continued and they are now coming to a head.

The UK will leave the EU at the end of the year come what may and the deadline for the trade talks is almost upon us. Boris Johnson has threatened to walk out if a deal is not ‘in sight’ by Thursday’s European Council summit, although Michel Barnier has said that the negotiations would continue right up to the 31 October Halloween deadline.

Happy Halloween?

It seems as though the market has been pricing in a resolution, as last week saw some strong returns from the domestically-oriented UK investment trusts with the most to gain. The reason these benefit is because a trade deal is generally seen as a positive for the British economy.

In the mid and small cap space JPMorgan Smaller Companies (LON:JMI) was up 11.3%, Mercantile (LON:MRC) 10.8% and Downing Strategic Micro-Cap (LON:DSM) 10.2%, with the best of the lot being the 12.4% gain by Temple Bar (LON:TMPL), which enjoyed a re-rating following the appointment of RWC as manager.

Despite last week’s strong uptick in performance it has been a difficult 2020 for all of these investment trusts as they have suffered from the disruption caused by the coronavirus and the threat of a no deal Brexit undermining the UK economy. The year-to-date returns and discounts are: JMI -13.5% and -10%, MRC -24% and -7.5%, DSM -28% and -19% and TMPL -50% and -10%.

Groundhog Day

The last time we saw this type of speculation about Brexit was August 2019 when there was a real prospect that we would leave without a withdrawal agreement. The threat of a hard Brexit peaked in mid-month and then diminished, with the news prompting a strong recovery in the FTSE 250 mid-cap index, which is heavily exposed to the domestic economy.

We have seen a similar bounce in the index in the last couple of weeks, so if you expect a trade deal to be reached by the end of the month it would be logical to think that the two pure mid-cap investment trusts JPMorgan Mid Cap (LON:JMF) and Schroder UK Mid Cap (LON:SCP) would do well. The former is down 31% year-to-date and trading on a 14% discount, while the latter has lost 27% with the shares on a 15% discount.

If you are really optimistic and think there will be a trade deal that will soon be followed by the approval of a vaccine for the coronavirus then the biggest beneficiaries may well be the UK value trusts Temple Bar (LON:TMPL), Aurora (LON:ARR) and Aberforth Smaller Companies (LON:ASL). The performance of all three has been dismal and they have moved out to wider than normal discounts with their bombed out cyclical holdings being about as out-of-favour as you can get.