City Editor Neil Martin takes a look at the range of comments and opinions coming into the IFA Magazine office as we start Article 50 week.
It’s the week when PM Theresa May will pen her Dear John letter and tell Europe we’ve had enough, it hasn’t been easy and divorce is now inevitable. She decided not to stick the boot in last week and spoil Europe’s 60th anniversary, but Britain is itchy to break free and start a new life.
As we all know, few divorces end well and it looks like there’s going to be some tears before the UK can celebrate being a free person again. The big question is, can the UK negotiators – who from all accounts are somewhat inexperienced when it comes to clashes like this and the real reason why Article 50 has been delayed – come out with a good settlement? Basically, what status will the UK have in terms of trade with Europe and will it have to cough up a cool $50 billion as an exit fee?
May is about to enter a negotiation where she’ll be damned whatever happens – she’s going to disappoint a large slice of the population. And given the amount of statements, and opinions that are coming into the IFA Magazine office at the moment, there’s plenty of advice and facts out there to show her how difficult it’s going to be.
Legal & General Investment Management
LGIM’s European economist Hetal Mehta pitched in with a good scene setter: “So far, Brexit has not been so bad for the UK economy. The formal process is yet to commence, but is it likely to cause a material economic downturn? Given that people have accepted the result, and that the media has flagged this, we would not expect a change in momentum caused by the start of the formal process in itself.”
“The main danger is around the nature of the negotiations, and the shifting risks around the UK. However, if the discussions are well-mannered and make good progress, the risks should diminish and we believe that the BoE could turn markedly hawkish as a result.”
Note the contention that the “The main danger is around the nature of the negotiations, and the shifting risks around the UK.” This translates as we’re entering a period of great instability and we all know what that means for investors.
Nigel Green, CEO of deVere, is warning that investors need to be wary of three key issues ahead of Britain formally starting divorce proceedings with the EU.
He says: “This is one of the most complex negotiations in political history with global consequences, and as with most divorce proceedings, it is unlikely to be completely smooth sailing. As such, investors need to ensure their portfolios are ‘Brexit-proofed.”
“With the clock ticking on the starting pistol being fired, investors need to prepare now for three key issues.
“First, be prepared for increased market volatility. Uncertainty creates tidal waves of volatility across financial markets – and the Brexit negotiations represent a huge unknown.
“Against a backdrop of growing volatility, investors need to ensure that their portfolios are truly diversified. This means investing across geographical regions, sectors and asset classes. Those with a well-diversified portfolio are always best-placed to mitigate risk in times of market turbulence, and best-placed to take advantage of the opportunities.
“UK assets, are likely to feel the heat. Investors should consider taking precautions against the potentially significant adverse effects of Brexit on UK assets, which they can do by increasing exposure to overseas investments.
“Second, be prepared for sterling to experience further swings. The pound fell 10 per cent against the dollar in the week after the referendum to leave the EU. Similarly, it dipped this week when Theresa May confirmed the trigger date of Article 50.
“Sterling is currently considered cheap, considering the underlying buoyance of the British economy, now forecast to grow 2 per cent in 2017. This is a buying opportunity for some investors. However, with an enormous question mark hanging over the negotiations, and the creeping inflation, the pound’s current low value might not last.
“And third, be prepared for the far-reaching impact of higher UK inflation and higher interest rates. This week, inflation hit its highest level in more than three years – and smashed the Bank of England’s official target. This has raised expectations that interest rates could be hiked sooner rather than later.
“This new landscape will present a new set of winners and losers for investors. A good financial adviser will help them select the right investments and, crucially, at the right time.”
Got all that? And there’s that word volatility. We’re going to hearing a lot about that over the coming two years.
On a slightly different tack, I’ve included an observation from NN IP which is seeing a pent-up demand for Eurozone stocks following weak investment flows.
Patrick Moonen, Principal Strategist Multi Asset, NN IP, says: “Equity investors have yet to rediscover the Eurozone. Following large outflows in 2016, flows are flat this year. This contrasts with inflows into US, Japanese and Emerging Market equities. So there exists an important pent-up demand for Eurozone equities if political risks recede.”
NN IP has completed an analysis which shows that Eurozone equities are underperforming versus the US despite the relatively better performance of earnings over the past 12 months. Part of this divergence is due to the rising political risk premium linked to Eurozone equities they say.
Moonen adds: “Under the assumption that we will not get the most negative election outcome in France, Eurozone equities have catch-up potential relative to the US. Earnings momentum in the Eurozone is positive whereas in the US it is slightly negative. The strength of the Eurozone macro data and the relatively bigger margin potential are two important growth drivers.”
Managing Partners Group
Staying slightly off-piste, here’s a view from the international asset management group MPG which asserts that one of the biggest countries to benefit from Brexit will be Malta. They argue that while Malta offers financial firms wishing to operate in the European Union several benefits, the alternatives all have serious flaws that make them comparatively less attractive.
Jeremy Leach, Chief Executive Officer at MPG, says: “Malta will be the biggest beneficiary following Brexit. After London, it should be the first choice for a financial firm to establish a branch or secondary office because its residents speak English and are well-educated, it provides easy access to the EU and it has an efficient regulatory process.
“It is politically stable, which is not so easy to say with regards to Italy and even France, while it also has a great financial rating, unlike Greece.
“Dublin is good and it offers English but it is more expensive and less tax-efficient than Malta while all the other options in Europe such as Luxembourg, Liechtenstein, Norway, Switzerland or Gibraltar have one or more flaws that weaken their case.”
Heartwood Investment Management
Back on track and Investment Director at Heartwood Investment Management Michael Stanes says: “The hard work now begins for the UK as it starts negotiations to exit the European Union. Triggering Article 50 no doubt marks a period of ongoing uncertainty for UK business and markets, but perhaps there is also some relief that the process is finally underway.
“While Brexit dominates UK concerns, French and German politicians will probably be more focused on their own national elections, which will further test anti-establishment sentiment. We continue to remain cautious on UK assets and expect higher inflation to weigh on real income growth this year.”
Scene Is Set
So there we are, the scene is set. This week the UK will make history. And whether you are a Leaver, or Remainer, we’ll be off to the races on Wednesday.
We’ll include as many comments as we can on Article 50 this week and over the coming days, weeks and months as the drama unfolds.
And may God have mercy on all our souls!