Sterling should strengthen from its current low levels as the UK and EU agree to a transition deal on Brexit, says Steven Bell, chief economist at BMO Global Asset Management.
The majority of global fund managers are neutral or negative on UK equities, bonds, property and the currency.
Sterling in particular is prone to volatility in the current political environment; consensus dictates a so-called ‘soft’ Brexit would be positive for the currency, and a ‘hard’ Brexit would be negative.
That’s certainly the view of Mohammed Kazmi, fixed income portfolio manager at Switzerland-based asset manager Union Bancaire Privee. Ordinarily, he says, these levels should give plenty of scope for upside. And “if we do get a good Brexit deal, it will shoot higher”. However, overall, he still sees “quite strong downside risks to sterling”.
“I don’t think the market has fully priced in a no Brexit deal, so we can go a lot weaker,” Kazmi adds.
But Bell is optimistic there will be a deal, although he says: “I don’t know what that deal’s going to be”. Certainly, business groups on the Continent will be pushing for a deal, even if their politicians aren’t convinced.
Bell adds that the risk of contagion is abating too: "Nobody’s thinking, ‘oh, let’s do what the Brits have done, look how successful they’ve been’.
“We look like a complete shambles and our growth rate, which was at the top of the league tables, is now towards the bottom.”
A deal, whatever shape it takes, should be positive for sterling, alongside a fiscal policy that is “moving towards mildly expansionary, and will get more expansionary in the next two years”.
“It’s at a level where historically you’ve never made money by selling sterling. Now, records are made to be broken, but the interest rate cycle is moving higher and the Brexit negatives are in the price and we do think there will be a deal,” Bell explains.
That view is echoed by fellow asset manager Fidante Partners, who predicts a last-minute deal, “that will allow the UK to leave the EU while providing some access to the common market”, will be struck.
“In this main scenario, sterling should appreciate sharply in the first quarter of 2019 and UK small-cap stocks should rally, while export-oriented UK stocks would underperform,” says Joachim Klement, head of investment research at Fidante.
