It is currently unclear which Brexit deal the UK will opt for and what the subsequent stock market fall out will be. But one thing M&G’s Richard Woolnough is sure of, is that it will throw up some attractive entry points for long-term investors.
There are three outcomes being mooted: a transitional deal leading to an orderly exit from the EU, a no-deal Brexit, and – much less likely – no Brexit at all.
Whichever happens, Woolnough, who manages the £23 billion Morningstar Silver-rated M&G Optimal Income fund, says sterling will be key. “If we have a bad Brexit, the exchange rate collapses… if we get no Brexit then presumably the exchange rate will recover,” he predicts.
After the Brexit referendum, the Bank of England cut rates by a quarter of a point in order to support the economy. Many believe a no-deal Brexit would see a similar reaction from the Bank.
However, Governor Mark Carney later suggested that rates may actually need to be lifted in the event of a no-deal Brexit. “The appropriate policy response is not automatic and will depend on the balance of the effects on demand, supply and the exchange rate,” Carney said last month.
Mis-Priced Opportunities
Woolnough says this mixed message from the Bank increases the uncertainty many feel. “Carney has hinted that if we had an exchange rate collapse, this time he wouldn’t feel as comfortable cutting rates aggressively," Woolnough explains.
“He might have to make a decision to hit his inflation target by putting rates up. I’ve got no idea what the Bank of England’s policy response would be to a collapse in sterling.
“Would it be to cut rates because they fear the economy’s very weak, or would it be to put rates up because, actually, they fear inflation turning up?”
What does that mean for Woolnough’s funds? The manager says he’s currently running very short-duration portfolios, so it is less sensitive to an interest rates hike. “In one scenario it means I don’t look very clever because I’m short duration; in the other scenario I look clever because I don’t go down as much as everybody else.”
One thing he is confident of, though, is that a hard Brexit will throw up investment opportunities, in pretty much every asset class.
“Brexit will throw up ridiculous opportunities as markets over-react. A big shock provides opportunities as long as you can recognise the price difference,” he said.
