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European investors weigh up Brexit deal risks

The idea of a 'Brexit' represented via jigsaw puzzle. 3D rendering graphics.

Asset manager appetite for UK investment remains in limbo despite the British government and the European Union striking a draft agreement this week outlining their future relationship after Brexit.

Britain remains deeply polarised over the issue, undermining investor confidence in the country, and global portfolios are unlikely to increase their long-term position in British domestic assets despite draft deal, experts said.

Thursday morning saw a clutch of ministerial resignations from the British government – led by Brexit secretary Dominic Raab – raising the likelihood that embattled British Prime Minister Theresa May will struggle secure backing for the deal from parliament.

“What does this mean for investors? For the moment, very little. If the parliamentary hurdle is cleared, a prerequisite for a Brexit “transition period” until January 2021, it would be positive over the shorter term, as it extends the current period of stability for two years,” said George Lagarias, chief economist at accounting group Mazars.

“Currently, we believe the chances of not passing are even, especially after the resignation of Brexit minister Dominic Raab. The bill – whether it passes or not – still does does not address the main issue for investors, which is clarity on what post-Brexit Britain looks like.”

An overwhelming majority (91%) of fund selectors and fund managers surveyed at Expert Investor’s event in Amsterdam on November 14 said that Britain has the most to lose economically by the Brexit process over the medium to long term.

Keep eye on Gilts

David Zahn, Franklin Templeton’s head of European Fixed Income, said May faces an uphill struggle to get the deal through parliament. “As a result, we expect uncertainty and volatility in UK and European financial markets for some months,” he said.

“Certain parts of May’s Conservative Party will not support this deal, because of its provisions for remaining within the European Customs Union.

“If May and her colleagues cannot garner parliamentary support for her agreement, the United Kingdom will essentially be heading for a no-deal Brexit, in our view. Gilts would likely rally, while the pound could decline significantly,” Zahn said.

Sterling fell 1.6% against the euro on Thursday morning.

Zahn added: “Parliamentary approval for the withdrawal deal, on the other hand, would bring some certainty. Under the terms of the withdrawal deal, if there wasn’t sufficient progress on a trade deal between the United Kingdom and EU, the United Kingdom would remain part of the European Customs Union until it can achieve a trade deal

“We expect that scenario could bring some short-term relief for markets; gilt yields would likely rise while sterling would probably rally.

“There are a number of scenarios in which gilt yields in particular could be much higher in six months’ time, or conversely, much lower.

“Investors will likely have to react to news flow coming out from Westminster and Brussels. It may be difficult to read through the noise, but we think for those investors who can, there may be a potential opportunity to add value to their portfolios,” he said.

Only 25% of 100 institutional investors surveyed by NN Investment Partners in November cited Brexit as a key risk to their portfolios in the coming year. The biggest concerns among investors were slowing global growth and aggressive US trade policy.

Hair-raising ride looms

Will Hobbs, head of investment strategy at Barclays Smart Investor, said: “As ever with the mostly unreadable twists and turns, the message for investors is to leave any strong convictions at the door. The crucial point remains that the UK formally agreed to the draft withdrawal agreement and political declaration on the future relationship between the UK and the EU. However, the politics is complicated to say the least.

“Our hunch remains that the potentially dark unknowns of a hard Brexit will incentivise compromise of one sort or another. If such a compromise is not found, we should be prepared for both the UK economy and its related assets to be subjected to a more hair-raising time for a while.”

David Robinson

David Robinson is the editor of Expert Investor. He has 18 years’ experience as a business journalist and editor. In the past he has written for the Guardian newspaper and The Telegraph, and worked as...