The possibility of another delay to the U.K.'s withdrawal from the European Union prolongs uncertainty about the U.K. economy and assets, leaving investors at risk that a no-deal exit could still occur in 2020.
Brexit was originally slated to happen in March 2019. But the U.K. Parliament's failure to come to agreement with its members as well as with the government on an exit plan has twice pushed back the date, which now stands at Oct. 31.
But even as Prime Minister Boris Johnson and his government have guaranteed he will request another extension from EU leaders if no deal is struck with the EU by Oct. 19 that is acceptable to Parliament, little progress appears to be made toward support from MPs for a viable Brexit policy.
Mr. Johnson is set to appear before Queen Elizabeth II on Oct. 14 to outline his key policies for the country, including his Brexit strategy for the final EU summit on Oct. 17. In the days that will follow the speech, the prime minister's priorities will be subject to a vote by MPs.
Extending the Brexit deadline further could be Mr. Johnson's defeat at the hand of MPs if he loses this vote, triggering a no-confidence motion from the opposition. A condition for the U.K. to remain in the trading bloc for a longer period of time could also be made by the EU leaders if no withdrawal agreement is accepted by the Parliament before the October deadline.
Meanwhile, the political deadlock is adding pressure to an already underperforming U.K. economy, a devalued currency and overall investment sentiment, which makes the U.K. a "frozen" market, sources said. Comparing the U.K. to Europe during its 2014 political turmoil, sources said the risk premium on U.K. assets along with an unpredictable currency are still not enough to attract investors.
Global fund transaction network Calastone Ltd.'s fund flow index found that active equity funds with exposure to U.K. equities experienced £3.5 billion ($4.2 billion) net outflows from institutional investors in July through September, more than in the previous three quarters combined. Active U.K. equity-only funds shed a net £1.2 billion, Calastone data showed.
"Clearly, the U.K. is pretty hated at the moment," said Richard J. Tomlinson, deputy CIO at the £17 billion Local Pensions Partnership, London, warning that in the long run, investors may struggle to have confidence in the market because they are not able to see how Brexit will play out during the life of their investments as the next stages of Brexit negotiation are unfolding, even if an initial withdrawal deal is struck.