Boris Johnson is accelerating towards a Brexit outcome as he prorogues parliament in a move that could create long-sought certainty for markets even if it results in a crash out of the European Union.
That is according to Rathbones multi-asset manager David Coombs, who is currently positioned for no deal Brexit and describes the current situation as a nightmare.
“It’s the same trade if we have an extension because both are relatively negative for UK assets,” Coombs says. “What the latest developments do mean is that we’re going to see an acceleration of events and the likelihood we are going to make changes is more likely.”
Most multi-asset managers Portfolio Adviser spoke with say Johnson’s prorogation of parliament has had little effect on their fund picks or asset allocation, although positioning varied from underweight to buying up undervalued UK assets based on their existing view of Brexit.
Last Wednesday, sterling fell to $1.218 as the government confirmed it would suspend parliament for five weeks in early September before reconvening on 14 October, only 17 days before the UK is due to leave the European Union. It has continued to fall since then hitting $1.203 on Monday as reports mounted that Johnson was planning to trigger a general election.
Large ego may fear no deal
The central view at Seven Investment Management is that no deal will be avoided and that another extension to Article 50 is likely – possibly via a general election or a second referendum. It is currently overweight the pound and will add to it if it continues to weaken.
“Johnson is playing a gun-to-the-head game which is bold and looks scary right now,” says 7IM investment manager Ahmer Tirmizi, who reckons the prorogation of parliament has not changed the parliamentary arithmetic that sees a majority against no deal. “Ideally, he needs someone to budge, be that the EU or parliament, and this may be a ploy to help make that happen.”
Tirmizi adds: “Bear in mind, though, that he is a man with a very large ego. A disorderly no deal would make him look incompetent and might well lose him the next election. He doesn’t want to go down in history as the most catastrophic PM since Anthony Eden.”
Sterling hedge
Psigma Investment Management is currently hedged around 70% in its balanced portfolios.
“Sterling to us looks extremely cheap,” says head of investment strategy Rory McPherson, who believes prorogation of parliament does not change the fact no deal is a distinct possibility.
“We appreciate the path to fair value will likely be choppy; with big moves ahead as news on the Brexit negotiations ebbs and flows but are of the view that a pound in five years’ time will buy considerably more than it does today.”
Psigma has recently taken money out of the Alliance Gilt Yield Fund as the asset class trades at record lows, while taking the sterling-hedged share class when adding to the GSAM Japan Equity fund.
Rathbones is also hedging its large exposure to overseas assets. Coombs reckons sterling could swiftly move five to 10% on a Brexit outcome.
Fund picks as Brexit outcome nears
Architas is also positioned for a possible hard Brexit, like Psigma and Rathbones, but has taken a more cautious view.
“The overall outlook is not pretty,” says investment manager Jen Causton. “The economy shrunk last quarter on this political uncertainty, felt via diminishing consumer confidence, reduced business activity and a lack of investment by corporates. The engine of our economy, the service sector, slowed to its weakest rate in three years.”
The Axa-owned multi-manager is currently underweight small and mid-cap UK stocks, which Causton reckons could suffer the most in the coming months. “We favour vehicles such as the TB Evenlode Income fund which offers less exposure to domestic earnings than some other UK funds.”
Over at Tilney, head of multi-asset funds Ben Seager-Scott is investing in Nick Train via Lindsell Train UK Equity as well as Anthony Cross and Julian Fosh via Liontrust Special Situations.
“The Brexit outlook has been hardening for a number of months and in that sense prorogation acts largely to bring the various factions in parliament to a showdown – perhaps slightly sooner than expected – but doesn’t necessarily change the Brexit outlook,” Seager-Scott says.
He likes the Lindsell Train and Liontrust funds because of their bottom-up approach to high quality companies.
On a tactical basis, bearish international fund managers pushing down UK valuations is offset by businesses holding off investment, which he describes as a serious headwind to the domestic economy. As such, Tilney is neutral.
He adds: “Prorogation, to my mind, doesn’t change the balance significantly, but it does bring forward the showdown which I suspect will lead to more volatility in the currency as the anti-no-deal-Brexit plan is deployed this week, but the outcome of that seems quite unknowable to me – and therefore I don’t see a strong case for rational investment activity.”
