Prime Minister Rishi Sunak and European Commission President Ursula von der Leyen both hailed their post-Brexit deal as a chance to reset frayed relations between the two sides. For investors in British assets, the repair work is only just beginning.
(Bloomberg) — Prime Minister Rishi Sunak and European Commission President Ursula von der Leyen both hailed their post-Brexit deal as a chance to reset frayed relations between the two sides. For investors in British assets, the repair work is only just beginning.
BlackRock Inc. and Abrdn Plc are among asset managers overseeing more than $9 trillion combined that expect the deal to remove only some of the uncertainty that has dogged the UK since Britain voted to leave the bloc in 2016. Others, including Invesco Asset Management, said the agreement won’t meaningfully help the UK economy.
“I am underweight UK equities in my model portfolio asset allocation and this deal is not going to change that,” said Paul Jackson, global head of asset allocation research at Invesco. “Investors may consider the UK to be a less important part of their core portfolio as a result of Brexit but I suspect there are also some cyclical aspects to this as well. Some of those flows will come back but some of them will be lost forever.”
UK assets have long been out of favor with investors because of Britain’s lackluster economy and, more recently, the chaos of former Prime Minister Liz Truss’s unfunded tax cuts. Monday’s Brexit deal may have removed some of the lingering uncertainty but it wasn’t enough to trigger an immediate rally, and UK stocks lagged the broader gains across Europe. The country’s problems, from runaway inflation to disagreement between parts of the union and looming general elections, remain too great for many investors to rush back in.
Still, the deal does go some way toward improving rock-bottom sentiment toward the country’s assets. “If we never have to talk about Brexit again, the UK would be more investable,” Man Group Chief Executive Officer Luke Ellis said on Bloomberg TV on Tuesday.
The pact comes after a year of political turmoil that dragged sterling close to parity versus the dollar and left UK stocks as the world’s most disliked. The UK’s FTSE 100 and FTSE 250 indexes have significantly lagged all major equity benchmarks since the Brexit vote in 2016, with the domestically-focused gauge down 15% since the end of 2021, when Britain officially left the EU.
The impact on the economy may also be limited. “It’s a relatively small positive. This could be the starting point of a more cooperative phase between the EU and the UK,” according to Wouter Sturkenboom, chief investment strategist for EMEA & Asia Pacific at Northern Trust Asset Management. But the deal isn’t impactful enough for him to change his view on the UK equity market overall, he said.
Meaningfully improving investors’ opinions on UK assets is going to be a long road. Data from EPFR Global showed that a record $26.3 billion was pulled from UK equity funds last year. And while sentiment has been improving since last year’s market turmoil, a February survey from Bank of America Corp. showed the share of global fund managers that are underweight UK stocks was 11%, while 9% of investors said they’re now overweight European equities.
The pound and the FTSE 250 rose to session-highs on Monday after the deal — though the UK gauge still underperformed Europe’s Stoxx 600 and Stoxx 50 indexes on the day.
Still, others are more positive. The deal is “the first positive progress that the UK has made in its relationship with the EU since Brexit. One would hope that that can then open the door for collaboration in other areas,” said Dean Turner, chief euro zone and UK economist at UBS Global Wealth Management. It also takes the risk of an “all-out trade war” between the UK and the EU off the table, he said.
Nicole Kornitzer, portfolio manager of the Buffalo International Fund at Kornitzer Capital Management Inc., which oversees about $6 billion, agrees. “Business investment in the UK has been hampered by a lack of confidence ever since the Brexit vote. A return to healthier investment levels would boost GDP and improve confidence in the overall business environment, attracting more investors,” she said.
–With assistance from Nishant Kumar.
(Updates with Man Group comment in fifth paragraph.)
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