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Is a ‘softer’ Brexit on the cards? UK’s top PMs on the latest election shock

Is a ‘softer’ Brexit on the cards? UK’s top PMs on the latest election shock

The second UK general election in two years ended in a surprise result which saw prime minister Theresa May’s attempts to bolster her mandate undone as the ruling Conservative Party failed to gain an overall majority.

Having sprung the snap election to strengthen her hand ahead of Brexit negotiations starting this month, what does the onset of a hung Parliament mean both politically and from an asset allocation perspective?

Citywire Americas' sister site Citywire Selector caught up with four leading UK fund managers to see how they were positioning their portfolios in response to yet another shock election result.

Fools rush in

Investors should hold fire instead of diving into depressed assets, according to Pimco’s head of sterling portfolio management, Mike Amey.

‘Brexit was not the primary focus of the electorate, as witnessed by the mixed performance of the Liberal Democrats. The knee jerk reaction has been negative for the British pound and potentially positive for gilts given the uncertainty,’ he said.

‘However, a move to less austerity and potentially a lower probability of a so-called “hard Brexit” suggests that investors should caution against chasing any initial moves in UK assets.’

Shift to soft stance could be good

The likelihood of Britain having to drop its ‘hard Brexit’ could be positive for UK equities and risk appetite could be revived, according to Old Mutual Global Investors chief executive Richard Buxton.

‘Just as was the case in the EU membership referendum, the most marked and immediate expression of the result of the vote in the financial markets was seen in the movement of sterling relative to other major currencies; the pound fell initially by approximately 2% against the US dollar, before paring those losses somewhat,’ he said.

‘With this election now mercifully behind us, and the threat of a cliff-edge ‘no-deal’ Brexit waning, there may just be some cause for optimism that risk appetite will make a return. Although a period of uncertainty will not be welcomed by the market, any further signs of a “softer” Brexit, combined with the tailwind of still-improving global demand, could bode surprisingly well for UK companies.’

Growth grinding lower

With bond markets weakening overnight, Jim Leaviss, head of retail fixed interest at M&G Investments, believes already slowing growth will come under increased pressure.

‘The momentum of UK economic growth has been fading as we move through 2017. Retail sales growth, house prices and inflation adjusted incomes are all weakening in what remains a very consumption driven economy,’ he said.

‘This election result and the continued uncertainty it brings suggests that this trend continues. The Bank of England is not going to tighten policy for the foreseeable future – although there is also no likelihood of an “emergency rate cut/QE” of the sort we saw post the Brexit result last June.’

Weaker hand to negotiate

Citywire AA-rated mixed asset specialist Paul Flood believes further currency weakness could be on the cards. The Newton Investment Management investor said ongoing uncertainty means diversification is key.

‘Investors could also be concerned on the direction of the UK economy given those uncertainties; large cap global companies may out-perform domestically orientated companies given the global revenue streams and overseas earnings,’ he said.

‘Currency weakness may lead to higher inflation in the UK, which is supportive of assets with inflation-linked revenue streams such as renewable energy assets to outperform government bonds, which are likely to come under pressure as lower economic growth leads to higher government borrowing against a more inflationary pressures from a weaker currency.’

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