A final Brexit deal is still years off, warns wealth manager Coutts, but the UK will thrive post-Brexit and corporate confidence will return once a transitional deal with the European Union is struck.
The Queen’s Bank re-iterated its longstanding belief that a transitional deal will be reached between the two parties, but cautioned that it will likely take “two, maybe even three, years to work that through”.
The UK will remain “an excellent place to do business” once it leaves the trading bloc, according to Alan Higgins, head of multi asset at Coutts. He adds the firm is bullish on the outlook for sterling, which continues to strengthen.
“It’s quite clear the UK economy has been lagging in the last year or so,” he explains. “It’s still seen positive growth, but has lagged global growth as corporations, both industrial and financial, have become more cautious. A transition deal will introduce more confidence to the corporate sector.”
There’s still, clearly, a long way to go in the negotiations between both the UK and the EU as both sides attempt to get the best deal for their respective parties. But Monique Wong, multi-asset investment manager at Coutts, thinks it will be worked out and the UK will see little detrimental effect in the long run.
"Inflation has Peaked"
Given their views on the pound, Wong also says she expects that inflation in the UK has peaked, as the effect of sterling’s depreciation falls out of the reading.
Indeed, we saw the first fall in the Consumer Prices Index in six months on Monday. As that trend sets in and US inflation begins to rise, Wong expects to see some convergence between the two figures going forward.
“Both the US and UK have tight labour markets with not a lot of wage gain,” Wong says. “It would be nice to see more of that but obviously we have the challenges with regards to Brexit uncertainty and the growth outlook.
“UK growth hasn’t been as bad as many people in the markets had been afraid of and I don’t think it’s going to be terrible, certainly I don’t think we’re going to fall off a cliff.”
Higgins says Coutts’ portfolios have gone from around 62% sterling to 75% recently as its conviction on the currency gets stronger. “For our international mandates we’re actually overweight sterling,” Higgins adds.
The pound fell dramatically in the wake of the UK’s decision to leave the trading bloc, impacting investments and the economy, but strengthened throughout the course of 2017. It’s now back up at levels not seen since the immediate aftermath of the vote, climbing 15% in the past year alone.
Higgins says there’s too much pessimism priced into the currency currently. “We believe that purchasing power parity does work; the trouble is it’s very, very long term. Whether it will work this year is, frankly, random. But it does seem to work.”
That said, in the interest of diversification Higgins says he’s not gone 100% to sterling. “We still have some money outside of sterling. We’re looking to protect value and are always looking for interesting strategies that have an element of a sterling hedge.”
