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Brexit reality over risk

10 January 2021

The short-run impact of Brexit on the UK economy will have a limited impact on portfolios, according to William Dinning, chief investment officer, Waverton Investment Management.

The firm’s Waverton Portfolio Fund has increased its exposure both to the UK and to sterling, in addition to alternative investments that are dominated in or hedged back to sterling.

Dinning says: “A collapse in sterling was the biggest macro risk attendant upon a short-run disaster on Brexit and the fact that we have not seen a surge in sterling since the announcement of the deal, but rather a moderate ascent, is a reminder that markets were already discounting a sensible ‘muddle-through’ scenario.”

According to Dinning, while the agreement of a deal is more constructive for the UK and the EU compared to the alternative of no-deal, there are still a number of unknowns that could prove problematic.

Dinning explains: “Leaving the EU allows the UK to pursue trade deals of its own with the rest of the world which could, over time, be a positive. The UK has signed 62 trade deals already, but the US, China and India, for example, are not yet done.

“Providers of financial services have adapted by ensuring they have a physical presence in the EU to continue to sell there but there remain a lot of unresolved issues that will complicate matters for not just the big banks, but also for boutiques. Regulations around investment management, for example, are now divergent.”

Dinning says the way the relationship between the UK and the EU evolves will be critical for domestic politics on both sides of the channel.

A smooth transition with no supply chain issues, no major issues in Ireland and a manageable level of disruption and cost for those doing business in the EU will enable the UK to resume a sense of normality quicker, as well as provide the most benign scenario for the UK financial assets.

Dinning explains: “The UK stock market’s underperformance of its global counterparts in recent years has seen it shrink to just 4% of the world index. The large drug and consumer companies in the UK, and the many companies outside the FTSE 100, could now be looked upon more favourably. This benign scenario would also likely see sterling continue its recent rally. A stronger sterling and a stronger stock market are not mutually exclusive; both could appreciate in a generic re-rating of UK assets.”

Dinning says that given how little detail of future arrangements has yet been agreed, much will depend on the ongoing goodwill between the political parties.

He adds: “The story will continue to evolve over 2021, and it is important to remember that we are now out of the EU, with a deal, meaning Brexit is now the reality, not a risk.”

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