Market Views: Bracing for Brexit
Brexit has brought to the table a whirlwind of uncertainty and tragi-comedic drama to historically one of the world's most stable democracies and its fifth-largest economy (just about), with potentially negative consequences for the world's largest trading bloc and, most of all, the UK.
So it's no surprise that equity investors have generally taken it badly, with the Stoxx Europe 600 shedding 12.89% last year and the FTSE 100 losing 12.5% – its biggest annual decline in 10 years.
With less than two months to go to the Brexit deadline on March 29, there is still deadlock and little sign of a deal that will command a majority in the British parliament and be agreed to by the European Union. The chances of a 'no deal' are growing.
For investors looking on from the outside, the challenge is clear: should I invest in the UK or should I not? Should I take advantage of the weak pound and oversold markets to gain exposure to world-class assets and companies, or maybe wait for a firesale, or should I rein it in and try to steer clear?
And how will Brexit affect London as a destination for, and as source and conduit of, international capital? In short, what should I bet on: the Britain of James Bond or the Britain of Mr Bean?
AsianInvestor asked four specialists for their views on the impact Brexit might have on investor interests in the UK.
Rolfe Hayden, partner
Simmons & Simmons
It depends on the outcome of present discussions in the British parliament. The uncertainty has, to date, made investors hold back but the exchange rate is favourable and assets are cheap. Sentiment will likely improve as the relationship between the UK and EU becomes clearer.
It is likely that there will be a shift to continental Europe of more jobs and that financial institutions will continue, for both regulatory and commercial reasons, to beef up their presences in Dublin, Paris and Frankfurt, regardless of whether there is a deal or no deal.
However, [as with] the advent of the euro currency, the predicted demise of London as a financial centre is overstated. There will be a greater regulatory burden on financial institutions doing business in Europe as a result of Brexit. But for most Asian investors, London will likely continue to be the first port of call regardless of Brexit.
Fundraising in the UK may become easier if the regime in the UK is allowed to move away from EU rules, such as AIFMD [Alternative Investment Fund Managers Directive].
As to which asset class will bear the brunt the most in a 'no deal' scenario, there is going to be greater volatility and UK property will arguably fall the most, although this could be short-lived.
Tim Graham, senior director for international capital
JLL Asia Pacific
The UK remains a key target market for a wide range of investors from the Asia-Pacific region ... By and large, we expect investors to adopt a 'wait and see' approach over the first quarter of the year given the current Brexit impasse.
Beyond this, we expect to see a revival in activity. It is clear that the UK, and in particular London, remains central to investors’ global real estate strategies and almost without exception, investors believe in the long-term future of the UK.
Investors’ approach to real estate is becoming increasingly global and 2018 saw global transactional volumes exceed 2017. Asian institutional investors continue to seek to diversify their holdings and key gateway cities in both the UK and Europe continue to be highly sought after, with investors attracted by the asset quality, income security and rental growth being offered.
Those expecting Brexit to lead to pricing turbulence in which they can buy UK assets at a discount will be disappointed. There is a significant weight of capital seeking access to UK real estate and the relative lack of stock remains the primary cause of frustration amongst global investors seeking to increase their allocations to the UK. So investors will continue to consider alternative ways to access the market, including M&A, platform acquisitions and debt funds.
Patrik Schowitz, global multi-asset strategist
JP Morgan Asset Management
The outcome of the Brexit process remains very uncertain ... It is important to distinguish between the short- and long-term impact of a [potential] hard or no deal Brexit on the UK economy.
The initial impact would likely be a severe disruption of trade and economic activity. This would be felt acutely at first, but then fade over time. The longer-term negative impacts, such as diminished inward investment and trade, would take a while to be felt, but likely last for a very long time.
For now, investors are more concerned with the former issue, and UK assets – and UK equities in particular – have been out of favour with investors globally, not just in Asia. Given the high level of uncertainty, many investors have perceived UK assets [as] simply uninvestable, independently of their inherent attractiveness. The British pound has so far served as the main shock absorber throughout the Brexit process; its weakness has been one key driver helping the UK economy [to] perform relatively well despite [the] heightened uncertainty.
However, UK large-cap equities have a strong negative relationship with sterling – given their high foreign exposure, they benefit from a weaker currency. UK equities currently look very attractively valued and are fundamentally high-quality.
Investors should remain neutral for the time being, holding off buying into UK equities until after a Brexit deal has been reached and the negative effects of a likely resurgence in sterling have washed through.
Stefan Lowenthal, chief investment officer
Macquarie Investment Management
The biggest fear ... from a global investment perspective is the negative sentiment that [Brexit could] trigger.
If you look at the sterling versus US dollar, versus other currencies, a lot of the Brexit risks are already in the price, but it could trigger some more negative sentiment that could spill over to some other equity markets, like in Europe, for example.
Still, we are pretty constructive on Europe on a longer-term [basis] rather than see Brexit as a key risk right now, until you see some clearer signs. We think [Brexit] will only have temporary effects from the global perspective. Of course, for the British economy it might be a different story because they are impacted by Brexit much more than all the other economies, but from a global investment point of view, it’s more a sentiment effect.