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LONDON – Never mind Britain’s general election and January 2020 Brexit deadline — there is a fog over UK assets that won’t lift any time soon, some of the world’s biggest money managers said.
Asset managers speaking at the Reuters Investment Summit in London were broadly of the view that whichever party wins Dec. 12’s election, Britain has dodged the worst-case scenario of a no-deal Brexit.
But they fear the new Jan. 31 Brexit deadline only marks the start of a new headache — negotiating a lasting trade relationship with the EU by December 2020, when the transition period agreed with Brussels ends. Following that, trade deals must be also struck with the rest of the world.
If that takes more time than expected, it could lead businesses to hold off on much-needed investment, weakening growth and hurting markets even more, investors told the summit.
The pound has bounced in recent weeks after Prime Minister Boris Johnson clinched a revised exit deal — which has yet to be approved by the British parliament — and hasn’t fallen much even after he called an early election.
But Sonja Laud, chief investment officer at Legal & General Investment Management, Britain’s biggest asset manager, said markets did not appear to have thought much about what would happen after January, assuming Brexit happens, and predicted they would do so only after the election.
She sees a directional bet on sterling as “too risky”.
“We don’t have a deal (with the EU), we just have a divorce and let’s face it, a free trade agreement is equally fraught with problems and forks in the road,” Laud said.
“Reality might kick in when we have the first roadblock in terms of real negotiations,” she said, adding it could take as much as 3-4 years to strike a permanent agreement.
But the UK is nowhere near that stage — the process starts only after the withdrawal agreement is ratified by parliament. While Johnson has vowed not to extend Brexit beyond the January deadline, another hung parliament after the election could cause a delay, eating into the negotiation period.
What’s more, Britain will not be able to strike trade deals with non-EU countries during this time.
Pascal Blanque, who oversees 1.5 trillion euros ($1.7 trillion) at Amundi, said the fund had been “moving away from UK assets across the spectrum”.
“It will be a long journey and Brexit itself — the discussion with the EU — will also be a long journey,” he said.
Latest data from Bank of America Merrill Lynch showed on Friday that UK equities, which they branded as “extremely unloved”, had enjoyed 15 straight days of investment inflows, the longest winning streak in four years.
Shares in Britain-oriented firms listed on the FTSE 250 index are up 5% in the past two months .FTMC and some investors, such as Arbuthnot Latham, say they have added exposure at the expense of the internationally focused FTSE 100 benchmark.
British government bonds too may see yields rise if borrowing goes up to fund the spending plans outlined by major parties in election campaigning. That makes gilts unattractive, the world’s biggest bond manager PIMCO told the FT this week.
Graphic: Sterling pre- and post-Brexit referendum,
Graphic: Less investment, less productivity png,
MORE UNCERTAINTY
Conventional investors tend to see uncertainty as a deal-breaker so it’s unsurprising that British business investment is down 1.1% since the 2016 Brexit referendum. The Confederation of British Industry says investment in other industrialized economies has risen 10% in this period.
Averting an abrupt no-deal Brexit means the economy might dodge recession but the Bank of England’s Thursday statement showed it sees risks for longer-term growth.
Trade negotiations could yield anything between punitive World Trade Organisation tariffs on UK exports to a close replica of the current UK-EU relationship — the best case scenario for markets.
Talks are also opaque, with plenty of public posturing that is often not linked to the actual outcome, noted Didier Saint-Georges, who helps manage 35 billion euros at Carmignac.
“I’m not going to wake up on Feb. 1 thinking ‘that’s it, now we have visibility’,” he said.
Not all summit participants were gloomy. Peter Fitzgerald, multi-asset CIO at Aviva Investors, sees more than a 20% chance Britain will opt to Remain. Having broadly been short sterling for five years, he has now gone long.
Follow Reuters Summits on Twitter @Reuters_Summits
Reporting by Elizabeth Howcroft, Editing by Sujata Rao and Catherine Evans
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