UK's Theresa May Quits - What Wealth Managers Said

Editorial Staff

28 May 2019

After what seemed an agonising wait, the UK Prime Minister last week announced that she is to resign after her latest bid to push a Brexit withdrawal agreement through Parliament failed. The ruling Conservative Party fared badly in the European Parliamentary elections, with the nascent Brexit Party polling strongly, while the main opposition party, Labour, also lost seats. The UK is due to leave the EU unless other things change, on Halloween – 31 October this year.

At the heart of the issue is that most legislators don’t want the UK to leave the bloc – in which it has been a member since 1973 – without some form of free trade agreement. By taking “no deal” off the table (which would put the UK under the World Trade Organisation system) it has been argued by Brexit supporters that the UK has thrown away the vital lever of being able to walk away from talks. On the other hand, many legislators worry that a “no deal” Brexit will put crucial sectors, such as London’s financial industry, at risk from protectionist barriers that would be erected by the EU. Already, some banks and fund managers have set up subsidiaries in EU member states such as Ireland and Luxembourg.

May’s resignation now triggers an election for leadership of the Conservative Party. Candidates will include former foreign minister and controversial newspaper columnist Boris Johnson, former ministers such as Dominic Raab (both who support Brexit) and others, such as Home Secretary Sajid Javid, government minister Rory Stewart and former Brexit minister (and hardline Brexit supporter) Steve Baker.
Here are some responses from wealth managers in the immediate aftermath of the result.

Mark Dowding, CIO at (part of the Schroders group)
The mixture of the unwillingness of the EU to re-negotiate, parliament's lack of appetite for a hard Brexit, and the potentially toughened stance on Brexit by the new prime minister points towards further political turmoil. It is hard to see how a compromise across various stakeholders can be resolved before 31 October. Ultimately, a political process such as snap election or a second referendum may need to take place to find a way forward.

As a result of the additional Brexit uncertainty, we expect UK economic activity to face further headwinds. The recent intensification of political turmoil has caused a sell-off in sterling to hit a 4-month low versus the dollar. At the time of writing, sterling has not reacted meaningfully after Theresa May’s resignation, hence it is a reflection that the news has been priced in. Going forward, sterling is likely to remain volatile and subject to downside risks in reaction to Brexit headlines.

Elliot Hentov, head of policy and research at
Sterling continues to be the main channel through which investors express their views about the outcome of the Brexit process. Although there is likely to be significant uncertainty and volatility ahead, we remain alert for opportunities arising from the market reaction to the UK political situation. Sterling is undervalued, especially relative to our estimate of its purchasing power parity.

The appropriate response for individual investors will vary depending on their exposure to sterling and UK assets.

For global investors with limited exposure to the UK, we believe it is time to prepare to be cautiously adding exposure to the pound. Sterling looks cheap, which in itself suggests a long-term buying opportunity. But we feel it is still too early to take large positions. The outcome of the Brexit process remains hard to predict, and volatility is likely to remain high. That said, after the resignation of May, our bias is to buy the dips below $1.24 and start unwinding hedges as soon as the political situation allows. If investor anxiety pushes the pound as low as $1.15, the case for larger long sterling positions would strengthen.

For global investors with an existing exposure to UK assets, we recommend a careful review of positions using the above scenario analysis. We have long recommended that such investors consider hedging to protect against further sterling weakness; we think it is too early to unwind these hedges.