A number of leading fund managers are predicting a “Brexit bounce” for UK markets, with much of the bad news already priced in.
Investors could see both credit and equity markets rise, as politicians from across the political divide move to avoid a “no deal” Brexit.
Legg Mason says there are particular reasons to be optimistic for UK credit markets, despite the current political turmoil.
Legg Mason affiliate Western Asset points out that credit spreads are now back to levels seen prior to the original referendum.
Western Asset’s co-head of global portfolios Gordon Brown says: “We believe there is scope for UK credit to react positively to the avoidance of a no-deal Brexit, and for spreads to tighten from current levels.”
He adds that if there isn’t sufficient support for a deal then the most likely outcome is for the process to be extended, potentially leading to a softer or later Brexit.
In either case Brown says he would expect a positive uplift to the value of UK assets as a “considerable amount of Brexit-related bad news is already reflected in valuations.”
This more optimistic market view is shared by Tellworth Investments, which says the recent slide in value of UK equities presented a “once-in-a-decade buying opportunity” for longer term investors.
Tellworth’s head of data-driven strategies, Seb Jory says that on a forward price-to-earnings ratio UK equities were experienced a one-in-10 year event. He adds: “The median FTSE100 P/E is currently in the cheapest 10 per cent of readings since 1996.”
He adds: “UK equities ostensibly present the sort of value opportunity that managers have been demanding for most of this cycle.”
He adds that the “scare” factor of Brexit has helped drive prices down. But adds: “The risk-reward on UK equity indices is very attractive currently, and particularly for global businesses and large caps. They should not be ignored by default, indeed the complexities of Brexit are what has caused this opportunity.”
However, these more optimistic market views come as MSCI warns that a hard Brexit could wipe off almost 25 per cent off the value of UK companies.
It predicts that this disruptive Brexit would also cause a fall in the value of European stocks, with these markets declining by up to 10 per cent.
Pro-Brexit economists argue that the long-term benefits of being outside the European Union would outweigh any short-term economic pain the nation would experience.
However, other economists are concerned about the impact on trade and investment into the UK, particularly in the event of a no-deal Brexit.