Rathbones’ Coombs: currency not Corbyn is UK’s ‘biggest risk’

Sterling poses the biggest threat to the UK economy, argues Rathbones’ David Coombs, and will ensure 2018 is another “difficult” and volatile period for markets.

Although he is positioning his multi-asset funds to be able to weather the worst possible Brexit outcome and a possible Jeremy Corbyn-administration, sterling volatility has been the driving force behind his recent asset allocation calls.

“It’s totally unpredictable,” said Coombs, head of multi asset investments at Rathbones. “Currencies often are unpredictable but because sterling is so intrinsically undervalued, that risk feels higher than ever.”

The potential volatile cocktail of Brexit, Corbyn as leader and shaky sterling is why Coombs finds himself with almost zero exposure to UK domestic earners and is avoiding sterling high-yield and investment grade bonds.

“I could easily see sterling at $1.60 to the dollar if we suddenly all start loving one another in Europe and the UK again. That’s tough for us at the moment and drives a lot of our daily thoughts and what we’re doing.”

“Currencies often are unpredictable but because sterling is so intrinsically undervalued, that risk feels higher than ever.”

As for Morgan Stanley’s bold claim last week that Corbyn becoming prime minister is a “worse threat to business than Brexit”, Coombs agrees that “a Corbyn government would be very negative for UK assets” but called the bank’s choice of words “unfortunate”.

In theory, if Corbyn took control and “tried to do everything he said he would, it would have serious financial implications”, said Coombs, because it would dent foreign sentiment toward the UK further.

Corbyn’s plans to raise the corporate tax rate from 19% to 26% for larger businesses seems a sure-fire way to dissuade investors from lending their backing to UK companies or deciding to set up shop, he said.

“On top of Brexit when companies are already questioning if they want to stay in the UK, do you want to add even more tax to that lack of visibility? That seems remarkably brave.”

That said, “it’s a bit like Trump”, he noted. “Could Corbyn even get half of it through because the numbers are so fantastical? It sounds good on paper, but I’m not sure he could deliver it anyway.”

The possibility of a second referendum is also not out of the question, according to Coombs, particularly if it looks like the UK is going to get the short end of the stick of the trade deal with the EU.

Though he said this is even less likely than a second general election being called, “there is enough of a consensus in parliament, even on the Tory side, to really try to put a block on Brexit”, he added.

One thing he thinks is for certain – “next year will be a difficult one for markets” with volatility across equity markets, gilt markets, bond markets, even in sub-sectors of the property market “driven largely by volatility in the currency and volatility in inflation expectations”.

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