With the clock now ticking on negotiations that will see the U.K. leave the European Union, executives at money management firms, consultants and pension funds are split as to whether the true impact has yet to be priced in.
The consensus is not to make any sharp moves as a direct result of the March 29 triggering of the so-called Brexit, under Article 50 of the Lisbon Treaty. With all eyes now on the way negotiations will play out, some observers warn there might be more downward pressure on U.K. markets.
“Triggering Brexit ... has been known about for a long time and should not have a particularly meaningful immediate impact onto markets,” said Colin Pratt, investments manager at the £3.2 billion ($4 billion) Leicestershire County Council Pension Fund, Leicester, England. “The unknown is the ability to agree (on) the terms of Brexit in a speedy and harmonious way, and markets seem to be relatively relaxed that this will not throw up any major issues.”
But there is some fear the markets are too complacent about the negotiations. “Given the EU's position almost necessitates a hard stance — to discourage anyone else leaving — harmony seems an unlikely outcome,” Mr. Pratt added. “Markets hate uncertainty, and the more issues that the negotiations throw up, the more likely it is that markets will be nervous and volatile. There just seems to be more downside risks to equity markets at present than there are upside risks.”
The U.K.'s FTSE 100 fell more than 7% within minutes of opening on June 24, the day the outcome was revealed. The index has more than recovered since. Sterling, however, has borne the brunt of Brexit. The currency dropped more than 10% against the dollar June 24 to $1.35, and has continued to plummet. As of March 31, sterling was hovering around $1.24, after falling slightly after Article 50 was triggered.
But executives warned there might be more to come. “Right now we are underweight U.K.,” said Mike O'Brien, CEO of investment management, Europe, Middle East and Africa, and co-head global investment management solutions at J.P. Morgan Asset Management in London. “We think the risks that Brexit poses to the U.K. are not fully appreciated and are not fully incorporated into the pricing of the U.K. stock market.”
While J.P. Morgan executives think the world is moving into a global growth phase and the firm is generally overweight risk assets, it is underweight U.K. equities across asset allocation strategies and sees sterling as the only currency that might not strengthen against the dollar.
“We won't know how bad this will be until we start to get some degree of momentum in negotiations,” Mr. O'Brien added.
“I don't think everything is priced in,” said Paul Hatfield, London-based president and global chief investment officer at Alcentra. He said once investors focus on the potential that all risks are not yet priced in, combined with warnings from other markets on their expected relationship with the U.K. after Brexit, “news flow is going to be very important.” Although the euro continues to look resilient, and Alcentra executives remain bullish on the dollar, “I think sterling (will) come under fairly downward pressure just on the basis of news flow, and realizing how difficult the process of extricating (the U.K.) from Europe is going to be,” Mr. Hatfield said.
“The Brexit event has a strong political and institutional value in the short term, but the economic spillovers will materialize in the long run,” said Monica Defend, Milan-based head of global asset allocation research at Pioneer Investments.