A year after Brexit vote, UK risks persist
The risks are stacking up for investors a year after Britain’s historic vote to abandon the European Union: unstable politics, fears of stagflation and a currency nursing emerging-market-sized losses.
After sliding 15%, the pound’s performance is the worst among major currencies versus the US dollar over the past year. While equities have basked in the global stock euphoria — with help from the weaker sterling — further gains this year are expected to be capped near current levels.
As a weakened government embarks on divorce talks set to last until 2019 at least, a survey by Barclays showed investors rank the Brexit discussions second only to Italy’s political risk as the biggest threat to markets arising from Europe. Robeco Nederland turned short on the pound after a bungled election campaign by Prime Minister Theresa May resulted in a hung parliament and a surge of support for Labour leader Jeremy Corbyn.
Leon Cornelissen, Robeco’s Rotterdam-based chief economist, says he’s preparing for the third change in leadership since the referendum. “Long-term it’s impossible to predict what will happen and shortterm it doesn’t look too nice,” he said. “There’s a risk the government collapses in coming months which isn’t necessarily pound-friendly.”
Since the Brexit vote, the fortunes of the FTSE 100 Index have waxed and waned in inverse relation to the pound. In local-currency terms, the exporter-heavy benchmark surged 17% in the year that followed, but in dollar terms, it hovers near levels seen just before the referendum results. The gauge is projected to end the year at 7,500, implying a gain of just about 0.7% from last week’s close, according to the average of strategists’ forecasts compiled by Bloomberg.
The FTSE 250 Index of mid-caps — seen as more reliant on the domestic economy than the larger gauge — is up 13% in the same period, with most of its advance coming in 2017. In dollar terms, however, it is down 3%.
The chaos is benefiting gilts, which have made almost 7% for investors since the Brexit vote, compared with a 1% loss for German bonds and a small loss for US Treasuries in the same period.
Meanwhile, currency traders can no longer look for help from a Bank of England. As the demands of a shaky recovery trump the need to cool inflation, Governor Mark Carney has signalled he is in no hurry to raise interest rates.
The pound dropped to a three-decade low in the aftermath of the referendum. Analysts forecast the currency to end 2017 near its current level $1.27. In the meantime, however, given that “sterling’s sensitivity to headline news will increase even further”, strategists at UniCredit Bank recommend “booking profits in euro-pound longs for now and staying on the sidelines”.