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European selectors brace for worst as Brexit risk jumps

Brexit is one of the, if not the, biggest news subjects on media around the world.

British Prime Minister Theresa May’s contorted efforts this week to reopen Withdrawal Agreement negotiations with Brussels less than two months until the UK’s scheduled departure from the European Union has fuelled uncertainty among jittery European investors.

Continental European fund buyers had already been battening down the hatches ahead of any impending Brexit-related storms and are on average expecting to put more money into cash over the next 12 months, according to Last Word Research’s Q4 survey results.

However, although the same number of fund selectors in the UK agree with their European counterparts and are looking to increase cash weightings, an equal number of British fund buyers are also going to move out of cash, so the UK fund buyer community is split.

Moreover, quite a few more fund buyers in the UK are seeking to reduce currency hedging in their portfolios, according to Last Word Research.

Last Word Research conducts quarterly surveys with hundreds of fund selectors across Europe every quarter to gauge investor sentiment over the next 12 months.

Gulf in sentiment

There is a huge gulf in forward-looking sentiment between continental European fund selectors and their UK counterparts towards their eurozone/UK equity mix.

UK investors plan to reduce by a huge margin their eurozone equity exposure and retreat back to UK equities. Continental European fund buyers, meanwhile, plan to rebalance the other way, increasing their Europe ex-UK holdings at the expense of UK exposure.

“There is something of a consensus here between UK and continental European fund buyers: the vast majority believe that either the UK or both the UK and the EU will lose out as a result of Brexit, with relatively few believing the EU will be the big losers or that no one will lose out,” Last Word Research said.

However, there are some key differences. While two-thirds of continental European funds buyers think the UK will lose out, UK fund buyers are much more likely to think all will lose.

UK fund buyers are also more likely to give the two least popular answers: 15% think the EU and not the UK will lose out from Brexit and 10% think that, in the end, no one will lose.

Prolonged uncertainty

Neil Birrell, chief investment officer, Premier Asset Management, said: “Events this week suggest that the chance of a messy no deal exit has increased and the chance of a favourable good deal has fallen. In fact it’s all become more binary.

“It’s probably not good news for sterling and there will be the resultant impact on UK equities. Whilst we believe they look attractively valued, it is difficult to see UK equities making much progress in the very short term while uncertainty persists.”

Bethany Payne, global bonds portfolio manager at Janus Henderson said: “The EU aren’t seemingly willing to re-open the withdrawal agreement and the so-called UK ‘Malthouse Compromise’ for a facilitated customs union and technological solutions to avoid a hard border in the island of Ireland would continue to just be a rerun of previous unsuccessful negotiations.

“While a no deal scenario is still unlikely, these developments increase the risk of accidentally leaving the EU without a deal and plans may intensify from both sides to manage that outcome.”

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...

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