Merian Global Investors head of UK equities Richard Buxton has urged investors not to be “overinfluenced by every twist and turn” in the ongoing Brexit saga as two high-profile politicians quit the Cabinet over the government’s draft agreement with the EU.
Prime minister Theresa May announced on Wednesday evening that she had received Cabinet backing for a Brexit deal, but on Thursday morning her government was rocked after Brexit secretary Dominic Raab and work and pensions secretary Esther McVey announced they were quitting.
Other MPs resigned over the deal including Junior Northern Ireland minister Shailesh Vara, junior Brexit minister Suella Braverman and PPS to the education ministers Anne-Marie Trevelyan.
May now faces a difficult task getting the agreement through Parliament as it was rumoured most other parties as well as about 80 Tory rebels will vote against the deal.
Buxton (pictured), who is also manager of the Merian UK Alpha fund, said the deal was a major step forward but attention now switches to the degree to which the agreement is acceptable to all sides of the House of Commons.
He added: “The Westminster rumour mill will be in overdrive, but investors are encouraged to not be over-influenced by every twist and turn in the political drama, which will continue to run for some time.
“Even if it is a close thing, my expectation is that Parliament will ultimately endorse an agreement rather than risk a ‘no deal’ exit, with potentially damaging consequences for the UK economy, its citizens and voters.”
Sterling will be ‘judge and jury’
Buxton also said sterling “remains judge and jury” on the country’s future economic prospects and encouraged investors to watch the currency markets for their view on the prospects of a deal being voted through.
Sterling moved higher against the dollar to 1.31 after May’s original announcement but fell back to 1.28 on Thursday morning. It also lost ground against the euro falling from 1.15 in early morning trading to 1.13 mid-morning.
In the FTSE 100, housebuilders and banks were among the worst effected on Raab’s announcement as Barratt Developments, Persimmon and Taylor Wimpey shed 6.9%, 6.5% and 6.3% respectively, while RBS and Lloyds Banking Group dropped 6.4% and 4.7%, respectively.
The UK 10-year gilt yield was 6% lower at 1.42% following the news.
Investment outlook
Mike Amey, head of sterling portfolios at Pimco, said in the event there is a transitional deal, and it passes the various political hurdles, he would expect UK yields to rise and gilts to underperform global bonds, as short-term uncertainty is reduced.
Amey said: “With the UK economy at full capacity and some signs of wages rising, a deal also increases the likelihood of the Bank of England raising interest rates more than is currently priced in by markets – two rises over the next two years. This would in turn support the British pound.
“We would also expect yields on UK bank debt to unwind some of their premium relative to global peers. In each case, not all of the Brexit risk premium is likely to unwind, but each step towards a stable future trading arrangement certainly helps.”
George Lagarias, chief economist at Mazars, said in the immediate term the development means very little for investors.
He said: “If the parliamentary hurdle is cleared, a prerequisite for a Brexit ‘transition period’ until January 2021, it would be positive over the shorter term, as it extends the current period of stability for two years. Currently, we believe the chances of not passing are even, especially after the resignation of newly-appointed Brexit minister Dominic Raab.
“Passing of the bill would also put the train on its tracks towards an amicable negotiation on what the future trade relationship with the EU looks like. The deal, however, is a milestone, not a solution. It does not address the main issue for investors, which is clarity on what post-Brexit Britain looks like.”
Lagarias added: “We don’t expect global portfolios to increase their long-term position in British domestic assets.”
