Paola Binns, head of sterling credit at Royal London Asset ManagementThe impact of Brexit was swamped by the disruption of the pandemic, so it almost felt like a blip rather than the catastrophe that some had expected. Other than issues around Northern Ireland the transition felt smooth, at least on the ground. Confidence in the UK and Sterling has bounced back strongly now the ties with Europe have definitively broken. Time will reveal the true cost of Brexit, although how you measure this will be difficult, the pace of GDP growth for example? The pandemic has distorted economic data, making an assessment of the Brexit disruption even harder to measure. What is clear is that the UK is still attracting overseas investment and has progressed with trade agreements, all indicators that non-UK investors still view the UK positively.
As a bond investor in the sterling markets my view is very much skewed towards my investment class. The cost of borrowing for UK businesses was elevated compared to overseas borrowers because of the perceived Brexit risk. This has subsequently reduced over the last 2 years as investors are comfortable with the impact of Brexit. However, from an investment perspective sterling bonds are still relatively attractive, especially in light of negative interest rates which are prevalent across European bond markets.
The main risks for the UK are the same facing the rest of the world: How to deal with the aftermath of the pandemic, the vast debt overhang, the withdrawal of Central Bank support and “normalising” interest rates without disrupting the economic recovery.
Ian Francis, CIO, senior portfolio manager at CQS New City Investment ManagersThe UK high yield market five years on from the Brexit vote has a mixed outlook. Banks and Financials, which were strengthening their balance sheets post the GFC and cutting costs, will continue to perform well. The pandemic has certainly intervened elsewhere, increasing the likelihood of much higher inflation which is already being seen in raw materials for manufacturing , food processing and construction sectors. Other sectors which are only just reopening, such as hospitality and seasonal agriculture, are having problems filling vacancies and increasing the levels of pay required to fill these opportunities, which is a double whammy of post-pandemic and post-Brexit lack of Eastern European labour. Overall, I am sanguine about the longer-term outlook for UK high yield as long as inflation is a short spike and fuelled by demand, rather than pushed by supply shortages and wage inflation without increasing efficiency.
Ludovic Colin, senior portfolio manager, Vontobel Asset ManagementCovid-19 has disrupted the economy so much, and the palliative fiscal and monetary measures are so big and disruptive that it is impossible to gauge how well the UK economy is structurally doing. The anecdotal stories and data show that even post Covid-19, the trade will remain low with Europe. Red tape/restrictions have put many sectors in difficulty. The fishing industry is just the tip of the iceberg. Before Covid-19 hit, we knew that UK exports to the UK were down 40%. Now it is still too early to see how sustainable the rebound is.The other reality that will hit us soon is that the chance of the UK breaking up is now a reality. Scotland and the governing party SNP will try to break up from the Union as soon as the Covid-19 economic impact is receding, using democratic means. The new risk comes from Northern Ireland (NI), whose wish not to have a wet border with the rest of the UK wasn’t respected in the exit deal with the EU. The NI will be a source of huge tension between the UK and EU, bringing sanctions and slowing down the negotiations on services (Financials included). But the fact that roughly 40% of inhabitants of NI are now in favour of a reunification with the Republic is very worrying.Is there a “Brexit premium”? I believe so. The GBP is slightly undervalued, the FTSE is slightly undervalued vs. its peers, and some credit spreads are slightly wider than their equivalents in the EU for example. Is that premium big enough to pay for the long-term risks? Probably not. Is there a short-term opportunity still? Probably yes.
Andrew Pease, global head of investment strategy at Russell InvestmentsThe UK is set for a strong rebound in both GDP and corporate profits as it recovers from the dual headwinds of Brexit and the pandemic. The UK market is overweight the cyclical value sectors, such as material and financials that are benefitting from the post-pandemic reopening. Financials should also be boosted by the improvement in interest margins from yield curve steepening as the BOE moves closer to lifting interest rates. The FTSE100 is the cheapest of the major developed equity markets, and this should help it deliver higher returns than other markets over the next decade. Around 70% of UK corporate earnings come from offshore, so one near-term risk is that further Sterling strength dampens earnings growth. The other risks are mostly around policy missteps, for example, early tightening by the Bank of England or a premature move to fiscal tightening before the recovery is entrenched.
Michael Herzum, head of macro and strategy at Union InvestmentAfter lagging global equities for many years, we believe UK equities are no longer an underweight as valuations have begun to look more attractive. However, within the UK equity market we would favour mid-caps (FTSE 250) over large-caps (FTSE 100) at this time.Within the region, we are currently looking at several areas of value. Firstly, we like the strategic size-tilt towards mid-caps, which usually perform better in economic recoveries against large caps. Even large caps now look cheap by historical standards, but the big weight of the Energy sector (10%) compared to other regions (2-5%) remains a risk in our opinion. We also believe bond yields will move higher globally in the years ahead, and this could certainly be a headwind for UK large-caps.
Today (23 June) marks the fifth anniversary of the EU referendum, which saw the UK public vote to withdraw from the bloc. The outcome sent shockwaves through financial markets, with sterling sharply decreasing...