Investors buckle up for a wild ride

In a year that’s featured a global pandemic and a tidal wave of liquidity from central banks, investors are bracing themselves for a risk they’ve ignored for most of 2020: Brexit.

The prospect of the UK and European Union reaching a trade agreement by an October deadline is looking less likely, with Britain saying this week it’s willing to walk away and break international law in the process. That risks the pound falling to a 35-year low, stocks that lag international peers, and bond yields turning negative for the first time amid bets on Bank of England interest-rate cuts, fund managers say.

“If we have a big selloff in risk assets, and a bad Brexit outcome, then there’s no reason the pound couldn’t fall back through the March lows,” said Mike Riddell, a portfolio manager at Allianz Global Investors. That would mean a 12 per cent slump to around $1.14, the lowest since 1985.

The stalemate in discussions has already seen the pound suffer its longest losing streak since March when Covid-19 started to rip through the country, and has sent the yield on haven short-term bonds to record lows. Until recently, the risks associated with failed trade talks had been in the background, overshadowed by the economic fallout of the coronavirus. The pound, which has acted as a market barometer to Brexit since the 2016 referendum, had been rallying along with other currencies in Groupof-10 nations against the US dollar.

No-deal Odds

Complacency around Brexit prompted Riddell to add to a short pound position in recent months and use sterling as a risk-off hedge, mainly against the US dollar and the yen. Natwest Group has upped the chances of no deal to 40 per cent, a result it sees dragging sterling down to $1.20. Nomura International Plc sees the odds rising to 50 per cent over time. By contrast analysts ina Bloomberg survey expect only a mild drop in the currency to $1.30 by end-2020 and then gains next year.