Fund firms spend Wednesday digesting Brexit vote

Fund management professionals were out in force on Tuesday and Wednesday commenting on the UK’s Brexit vote in the House of Commons. Many expressed disappointment that the defeat of Prime Minister Theresa May’s proposals meant uncertainty would remain a feature of financial markets.

But some also appeared more optimistic of a deal between the EU and the UK.

Here is a range of opinion relating to the market reaction and to the political environment between the UK and the EU now.

Speaking shortly after the result of the vote was declared, Eric Lonergan, fund manager at M&G Investments, said: “The relatively trivial response of sterling to the overwhelming rejection of May’s deal by Parliament suggests to me that markets are not particularly troubled by Brexit.”

The range of outcomes – including the suspension of Article 50 or a ‘Norway’ deal – was “relatively clear and not particularly traumatic”, he said.

“The UK economy is already being affected by Brexit and is likely to remain so, but this is in the price of gilts and the exchange rate. No one expects the economy to surprise positively.”

David Zahn, Franklin Templeton’s head of European fixed income, said he believes financial markets are “crying out for an end to the uncertainty, even if that means accepting the short-term pain of a Hard Brexit”.

He said: “If Article 50 were rescinded we’d foresee a very positive response from financial markets, both in the United Kingdom and across Europe. Bond markets would likely sell off, sterling would rally and UK equities would probably go up. But this seems to us the least likely option.”

Terence Moll, chief strategist at Seven Investment Management, said Theresa May’s defeat meant a “bumpy ride for both markets and sterling in the coming weeks as the saga continues to unfold”, but that there would be opportunities for long-term investors to buy UK stocks amid the volatility. “Such an opportunity should not be overlooked by anyone with a longer time horizon than the next few months.”

Guy Ranawake, investment director on the infrastructure team at Ingenious, said Parliament’s decision will create continuing uncertainty on the future relationship of the UK with Europe, with a knock-on impact for the attractiveness of the UK for both domestic and international investors, particularly for illiquid investments. But he said it was unlikely to have any immediate impact on commercial infrastructure operations, including those linked to Europe.

On the political front, David Lafferty, chief market strategist at Natixis Investment Managers, said: “The 230-vote loss for May’s deal highlights how weak the UK positioning was from the start – after two and half years of negotiations, it still produced a deal that almost nobody wanted.”

He added that it was “hard to fathom her pulling a new, amenable deal out of her hat in a week or two if she couldn’t produce one after two years”, that “the EU remains frustrated that the UK can’t clarify its intentions”, and “there is virtually no common ground between what Parliament will demand versus what Brussels will agree to”.

Dec Mullarkey, an investment strategy managing director at Sun Life Investment Management, said that the immediate strengthening of sterling versus the euro –  which he described as the most immediate indicator of Brexit stress – after the vote suggests investors are becoming more optimistic about a deal and that “dialling down the Brexit tail-risk” should also start to support equities, particularly those at risk of having their export relationship disrupted.

Mullarkey added: “While the vote on Tuesday initially looked like an epic failure, it may have been the shocking scorecard that was needed to force the EU to cooperate more, and to pressure Theresa May to tap into the middle ground so she can consolidate a majority.”

The impact on Europe
Back at Franklin Templeton, David Zahn also commented on the Brexit impact on Europe, saying this had received little attention.

“Of course, Brexit will impact the United Kingdom the most, but we estimate EU growth could be hit by around 0.2% to 0.3% in the event of a Hard Brexit. In aggregate that may not seem much, but when the EU is only growing at 1.5% to 2% that represents a more sizeable chunk.

“So we believe there would be a strong motivation for the EU to move towards more normalised trading relations more quickly.

©2019 funds europe

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