The likelihood of a hard Brexit is high but investors need not fear market uncertainty: these are two separate views from the fund management community as the UK begins to leave the EU.
Article 50, which was triggered yesterday, leaves the UK and EU with two years to negotiate a deal.
A fund management economist said the EU was likely to adopt a tough negotiating stance with the UK to maintain EU unity.
Léon Cornelissen, the chief economist at Robeco, said that among other issues: “It is also important to note that the UK is obsessed with Brexit but for Germany this is just a sideshow – they’re much more interested in keeping the rest of the EU united while also worrying about Russia, China and the US. So I would expect the EU to adopt a tough negotiating stance in the interests of maintaining EU unity.”
With neither the UK nor EU showing early signs of compromise as the process begins, then according to one fund manager “the likelihood of a so-called ‘hard Brexit’ remains high”.
The two years are effectively made shorter by the lack of any signs of compromise, and by the French and German electoral processes, said Mike Amey, head of sterling portfolio management at Pimco, who added that failure of the two sides to clinch a transition deal in a year’s time would force business to assume the UK and EU would revert to trading under WTO rules.
Initial market response to yesterday’s news saw the pound weaken and gilt yields to modestly rise, but also little change in equity markets, Amey noted.
Pimco’s advice for risk management is to modestly underweight sterling and to underweight UK gilts.
Yesterday a fixed income manager at Newton said that currencies were the assets to watch as Article 50 proceedings began.
Nancy Curtin, chief investment officer at Close Brothers Asset Management, said: “The fall in sterling since the Brexit vote provided a boost to the value of UK large-caps, given the largely international makeup of the FTSE 100. However, it is also bringing some economic upside, stimulating a much awaited rebalancing of the economy, as exporters and manufacturers benefit from the cheaper pound.”
But with inflation on the increase and sterling reaching a one-month high against the dollar recently, “it’s unclear how long this positive backdrop will last”, Curtin added.
David Zahn, head of European fixed Income at Franklin Templeton’s fixed income group, said the firm believed Article 50 was unlikely to cause any shocks as Brexit was thought to be priced in to markets, and that investors “need not fear Brexit uncertainty”.
The resulting unknowns and volatility could present some opportunities, mainly around traditionally defensive assets such as gilts and corporate bonds as investors look for stability, Zahn said.
Advising that investors “keep calm and carry on”, Zahn added: “Currently, we feel too much of the pre-negotiation jockeying for position is being played out in the press. We hope that now Article 50 is triggered, people on both sides calm down a bit and conduct their discussions in private where negotiations can be more nuanced and effective.”
©2017 funds europe
