Investment managers wary as Brexit countdown gets underway

With just one year until the UK’s scheduled departure from the European Union, asset managers and financial analysts have expressed nervousness about the future and highlighted damage done to the UK economy in the 21 months since the referendum decision to leave in 2016.

Laith Khalaf, senior analyst at financial service company Hargreaves Lansdown, points to the fact that £6.7 billion (€7.6 billion) has been withdrawn from UK funds since June 2016.

This compares with £8.2 billion flowing into global funds and £19.3 billion flowing into fixed income funds over the same period.

While the UK stock market has returned 17% since the referendum, it lags behind other stock exchanges for UK investors and £10.5 billion has wiped off the UK retail sector since the Brexit vote.

“One of the starkest shifts since the EU referendum has been in the buying patterns of UK fund investors,” Khalaf said.

“While retail investors have been pouring record amounts into investment funds as a whole, they have been boycotting the UK, and choosing instead to park their money in global equities and bonds.”

Seema Shah, global investment strategist at Principal Global Investors, believes that the UK economy has held up “reasonably well” in the 12-months since the Article 50 (the formal notice of the UK’s departure from the EU) was triggered.

“However, this robust performance is not thanks to Brexit, but is in spite of Brexit,” Shah says. “The UK economy would have been significantly weaker were it not for the strong synchronised global recovery seen since the referendum result.

“Similarly, were it not for the Brexit vote, UK growth would have been meaningfully stronger.

“The transition deal, a timely one-year anniversary gift, has removed a dangerous source of short-term uncertainty for businesses.

“Yet there remains a significant insecurity about the UK’s trading relationship beyond then and the dismal pace of negotiations suggests that a trade deal is unlikely to be the two-year anniversary gift.

“As global growth continues, albeit probably at a more modest pace, my view is that UK stocks will lag their European, US and emerging market counterparts.”

Wolfgang Bauer, an investment manager at London-based M&G, says that, while UK government bond yields have risen from post-referendum lows in mid-2016 it is nevertheless “hard to get excited” about current valuations.

“In the case of a smooth Brexit, the removal of political and economic uncertainty would likely weigh on gilt valuations,” he said.

“In the case of a less orderly Brexit, Sterling would most likely get under considerable pressure and it is thus entirely possible that the Bank of England would try to defend the currency by hiking interest rates.

“So either way, there is upward pressure on interest rates and at current gilt yield levels investors do not seem to be adequately compensated.”

©2018 funds europe



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