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Thursday, December 7, 2023

U.K. Investing Class Sounds Warning as Post-Brexit Reality Bites

The historic Brexit trade accord may have sparked a relief rally, but investors are pouring cold water on the notion that it’s the beginning of a bullish era for U.K. markets.

The limitations of an accord that excludes services, the worsening pandemic and the fact good news is already priced into markets are big headwinds. For many, the best thing about the deal is that is the simple fact that it’s here at last.

“Brexit has bored the hell out of everyone. We can now all look forward to reading about something else on a daily basis,” said Mike Riddell, portfolio manager at Allianz Global Investors. “But don’t kid yourselves that this is the end, it’s only the end of the beginning.”

The pound pared gains on news of the Christmas Eve deal, staying near 2018 levels against the dollar. The FTSE 250 Index, a benchmark for mid-cap U.K. companies, rallied more than 2% during the week in the run-up to the agreement.

Some see a case for why the currency can shed its status as a reliable laggard among G-10 peers since the 2016 referendum — and for the British stock market to no longer be one of the most hated in the developed world. UBS Global Wealth Management, for one, touted the country this month as its most-preferred stock region.

Yet huge challenges remain, from the country’s economic trajectory to its trade relations with the rest of the world.

Here’s how investors are factoring in the watershed agreement into their allocation plans.

Jack McIntyre, portfolio manager at Brandywine Global Investment Management:

2021 should have a much better growth back drop for the global economy and the U.K. will benefit from it. It will take time for the ‘animal spirits’ to kick in. There is investment that has been sidelined that should start to come alive in 2021. I think sterling is still under-owned. Particularly, versus the other European currencies, particularly, the euro.

Karen Ward, chief market strategist for EMEA at JPMorgan Asset Management:

A Brexit deal is certainly helpful, particularly for the domestically focused companies in the index. But a greater support for the FTSE would be a sign that vaccines are being rolled out quickly and a global synchronised recovery is taking hold. If that narrative gathers steam in the early months of the year then U.K. equities may be one of the strongest performing markets for 2021

Mark Nash, bond manager at Jupiter Asset Management:

Some confidence should return and U.K. assets should now outperform especially if the value rally continues. Although U.K. growth is weakened, the falling dollar will see cable higher as more confidence returns. The weaker dollar and the search for other stores of value will support the pound regardless. This is another uncertainty pillar that’s being removed like the U.S. election, vaccine efficacy, so slowly we are getting through them to improve the outlook.

Riddell at Allianz Global:

The U.K. still has almost no trade deals, and negotiations with the EU are far from finished. Despite the market relief at a deal, the reality is that we are in what the Bank of England and others considered a very hard Brexit only a few years ago. You can question the BoE’s prior economic modeling and assumptions, but even the greatest optimists agreed the U.K. economy would experience a substantial negative shock under such an agreement in the short to medium term.

Wouter Sturkenboom, investment strategist at Northern Trust Asset Management:

Despite the attractive valuations of U.K. equities, we remain cautious on the investment outlook. The country has underperformed in the recession and is expected to underperform in the recovery too. And with the uncertainty regarding the impact of the new strain of Covid-19 added to the mix we will stay on the sidelines for now.

John Taylor, money manager at AllianceBernstein:

Even with a Brexit deal, we expect the economic recovery to lag the rest of Europe. And U.K. growth was hit harder this year. Credit spreads look unappealing relative to Europe where the ECB will be buying all year. If the currency continues to move higher then it may be an opportunity to sell as the reality bites in 2021.

Jordan Rochester, currency strategist at Nomura International Plc:

A few months ago, a trade deal was a “buy the rumor, sell the fact” moment for most folks as the FTA is nothing like single market access to the EU and the U.K. is one of the G10’s Covid-19 underperformers. But a vaccine has materially changed things. Markets will be looking for the countries that stand the most to gain and it will be those who were dealt the largest economic blows that will feature highly on their recovery trade playlist. The U.K. is near the top of the deck in this regard.

Michael Krupkin, head of G10 FX spot trading, Americas at Barclays Plc:

There is massive underinvestment in the U.K. and in U.K. assets, so we expect GBP appreciation on a positive trade deal, though services will ultimately be more important to long-term prospects — that is yet to be resolved. That said, we think there will be a significant rebalancing into U.K. assets once Brexit is done and dusted, but we can expect the same drama over a trade deal on services into 2022.

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