KW Wealth is hedging a bet on the British economy as the UK awaits the three key votes on Brexit next week.
The wealth manager said while a weaker pound continued to weigh on large caps and it was overall underweight UK equities within that asset class it was favouring mid-caps, expressed through focused vehicle Merian UK Mid Cap, managed by Richard Watts, and the broader portfolio of Allianz UK Opportunities, managed by Matthew Tillett.
Rupert Thompson (pictured), head of research at KW Wealth, said if the UK were to move away from a no deal scenario, the mid-cap space would likely make gains. “We’re not saying we are hugely bullish on mid caps, but they do look oversold and are much cheaper than large caps.”
Currently, KW said a ‘no deal’ Brexit was looking increasingly unlikely, with markets reacting “as one would have expected”.
The pound, as the most sensitive to Brexit news, was back up to $1.31 [at time of writing] and while he said still unlikely, the possibility of May’s “revised or not-so-revised” deal being approved by parliament, he expected could rise further to “at least $1.35.”
“I don’t think there will be a huge rally in sterling but it depends how long they can extend [Article 50]. If they can only kick it out for two months, I’m not sure how they are expected to reach an agreement within two months if they’ve not been able to for the past two years.”
Thompson suggested even if there were another referendum, it might open a whole can of worms.
“The danger with pushing for this, especially now Labour have stated their support, is that it might only go back via a tiny majority.
KW’s base case, he said, was “to try to not take too big a bet on Brexit”.
The head of research added: “We are more prepared to risk underperforming if things go well, than if things blow up and we’re going to be taken down further. That’s why we are underweight the UK.”
Market beyond the UK
While “calamitous” UK headlines are expected, he said global equities were more agnostic, picking up recently – in local currency if not in sterling terms – continuing their recent rally.
“Brexit is still very much a local, rather than a global, event.”
The other issue, Thompson pointed out was the potential impact to European equities.
“If there is no deal, sterling will fall against the dollar, then the euro will also fall, albeit to a lesser extent. Brexit is obviously worse for the UK but it will have some drag on Europe.
“The big disappointment is that the eurozone has slowed down far faster than before, and is not looking in particularly good shape at the moment.”
He added that ‘no deal’ now posed a greater threat to Europe – being on a weaker footing – than it did earlier in the negotiations.
“But if it makes Europe more vulnerable then it might make the European authorities less inclined to allow for a no deal if they would be worse hit.”
Between Brexit and the US-China trade tensions, Thompson said the firm felt confident in its long-time overweight to emerging market equities.
“With a strong dollar, the Fed tightening, EM still looks cheaper and with the stronger long-term growth prospects, the investment for emerging markets continues to make sense.”
