Investors should not take the Bank of England’s latest forecasts on the impact of Brexit on the UK economy as a sell signal. Instead, they should keep their eyes firmly focused on the horizon, says Brewin Dolphin’s Rob Burgeman.
According to the Bank’s latest projections, a no-deal Brexit could cause the sharpest slowdown in the UK economy for almost a century and see a return to stagflation. GDP could fall by 8%, house prices by 33%, unemployment rise to 7.5% and inflation increase to 6% leading to much higher interest rates.
On the other hand, if a close economic partnership is agreed by the two sides, GDP could rise modestly by 1.75% over the next five years.
But the disaster forecasts were the headline news picked up by the media and led to criticism of scaremongering by leading Leave-advocating MPs. For investors, it was just another fear to add to an ever-growing list of worries.
But Burgeman, investment manager at Brewin, warned investors not to jumping to negative conclusions, noting the forecasts were very much a worst-case scenario. “The Bank of England has a duty to look at the outlier,” he says.
“It has to look at ‘this is what good could look like and this is what terrible could look like’. What terrible could look like is not their core belief at all. In fact, they think that’s a really unlikely outcome.
“But clients and investors pick up on that kind of thing and they’re like rats up a drainpipe when they hear that.”
Don't Sell Everything
Brewin says that the Bank’s worst-case scenario is highly unlikely. But, notes Burgeman, even if clients thought it was a given, selling everything would be the worst possible course of action. He says that should inflation ramp up to 6%, it is highly doubtful the Bank would raise rates due to the impact that may have on the wider economy.
As a result, a portfolio of quality companies with an international outlook and pricing power is exactly what you want. “It’s not going to immunise you from volatility, but it will produce you those medium to long-term returns,” says Burgeman.
“In the end, when the outlook is as foggy in the short term as it is now, all you can really do is keep your eyes on the horizon and look for the sweet spots of where you want to be.”
Guy Foster, head of research at Brewin, says investors’ portfolios are a good hedge against Brexit.
True, it will make a difference to your lives when we can’t get any fresh water out of the taps, your Spanish lettuce has run out and you’ve got to queue to get down to Dover, say Burgeman. But in investment terms, “we are going to live or die by the Brexit outcome”.
Of course, all surveys show the majority of global – and many domestic – investors are running historic underweights to UK assets as they hold off until we have more clarity.
Brewin’s view on the UK is that sterling is cheap, first and foremost. “Whilst if the negotiations go very badly there may be another downward move, it feels like it will be another foot down, rather than another leg down.”
UK equities, too, are cheap, Burgeman admits. Despite that, the firm says its neutral weighting to UK equities is as low as it has ever been. Within that, its exposure to big overseas earners is as high as it has ever been.
The reason for this is the fact that there is no timeframe on when we are likely to have clarity on the outlook. “UK equities look cheap, sterling looks cheap, but what is the catalyst,” Burgeman asks.
“Can you put your finger on a date and say ‘at that point we’ll know’? We won’t even know on 29 March. More likely the can will get kicked down the road in true EU fashion.”
