The decision by the UK government to suspend parliamentary proceedings in an effort to force through Brexit on October 31 is “tantamount to actively pursuing a recession”, according to Principal Global Investors’ chief strategist.
Seema Shah said the move – which was formally announced yesterday by prime minister Boris Johnson – had pushed global investors to take a “do not touch” approach to UK equities.
“The PM’s move comes at a time when the FTSE 100 is on course to record its largest monthly fall in four years,” Shah said.
“The large, multinational businesses in the FTSE have, naturally, been highly sensitive to an escalating trade war between China and the US, particularly as the complex global supply chains of which they are parts face seismic disruptions. They are fighting political fires at home and abroad.”
Shah claimed that the most recent UK equity volatility corresponded with sterling’s valuation relative to the dollar being at “historically low levels”. Since the UK’s EU membership referendum in 2016, the falling value of the pound had boosted UK-listed multi-national companies as they benefited from enhanced international earnings.
The FTSE 100 index has fallen by 5.6% in sterling terms this month, as of 27 August, while the MSCI World index is down 4%. The FTSE 100 fell during trading yesterday but closed slightly higher after a late rally.
Since the start of 2016, before the EU membership referendum, sterling had fallen in value from $1.47 and €1.36 on 1 January 2016 to $1.22 and €1.10 as of 5:30pm on 28 August, following the confirmation of the suspension of parliament. However, sterling has traded below €1.10 during August.
“Company fundamentals remain broadly strong so the implication is that global investors have finally reached the ‘do not touch’ point for UK equities,” Shah said. “We appear to be at the limits of what the foreign exchange markets can do for companies, with the economic clouds beginning to shut out the rays of light afforded by a weak currency.
“The rare sight of the stock market and the currency market coming to the same conclusion – namely that the UK is best avoided for now – throws into sharp relief investor sentiment towards ‘no deal’.
“While turbulent markets will obviously create some attractive selective opportunities and relative value trades for stock pickers, the big international investors now look increasingly likely to decrease their exposure to the UK.”
‘Normal Brexit volatility’
Dec Mullarkey, managing director of investment strategy at SLC Management, argued that markets had not been “overly alarmed” by the prime minister’s “aggressive move”.
“The dip in the currency is in line with normal Brexit volatility,” he said. “This implies that while the move pinches parliament’s efforts to constrain Johnson, it doesn’t significantly raise the probability of a no-deal Brexit.”
If investors believed the UK was more likely to leave without a deal, Mullarkey said, “equity markets would be revolting as they price in severe growth setbacks”.
“Right now they are taking it in stride assuming that parliament can offset Johnson’s gamesmanship,” he added.
Johnson received approval from the Queen to suspend parliament until 14 October – less than three weeks before the UK’s scheduled departure date from the EU.
Johnson and other Conservative Party ministers have denied that the move was designed to limit the actions that opposition parties can take to stop a ‘no-deal’ Brexit. Many politicians have strongly criticised the suspension of parliament, with some calling for a vote of no confidence in Johnson’s government.
Boris Johnson’s attempt to suspend parliament to avoid scrutiny of his plans for a reckless No Deal Brexit is an outrage and a threat to our democracy.— Jeremy Corbyn (@jeremycorbyn) August 28, 2019
Labour will work across Parliament to hold the government to account and prevent a disastrous No Deal.
“Taking back control” has never looked so sinister. As a fellow parliamentarian, my solidarity with those fighting for their voices to be heard.— Guy Verhofstadt (@guyverhofstadt) August 28, 2019
Suppressing debate on profound choices is unlikely to help deliver a stable future EU - UK relationship.https://t.co/NyCoLA8nFe
UK risk assets ‘for the brave or foolhardy’
Gilles Moëc, group chief economist, AXA Investment Managers
“Our fundamental view has not changed: it is unlikely that any positive outcome on Brexit – such as a ‘deal’, an extension or even a second referendum – can occur without the UK – and UK assets – first going through an exacerbation of the current crisis sentiment.
“It is not constitutionally absolutely clear that those in parliament refusing a ‘no deal’ can actually, within the current time limits, impose their view on the government, just as it is also unclear whether changing the backstop would be enough for the Eurosceptic wing of the Tory party to support a new deal sponsored by Boris Johnson.
“New elections may be needed before any final clarification, and given the British ‘first past the post’ electoral system and the current dispersion of the electorate, uncertainty would be very high.”
Charles Hepworth, investment director for multi-asset, GAM
“Boris Johnson’s move makes it even more difficult for MPs to stop a no-deal Brexit, but this is precisely what [Johnson] needs in his armoury ahead of the EU summit – to go there with his wings clipped would see ever more intransigence from the EU. He announced his arrival as PM saying that the ‘UK was leaving on 31 October, do or die’ – this move near enough guarantees it now.
“Sterling, which had become a net long investment thesis for some recently, could see sharp and fast moves to the downside – it’s a roller coaster and the likely trajectory remains to the downside. Potential rushed no-confidence motions, continuing general election speculation calls and a cliff edge rapidly approaching – how is that favourable to a net long sterling view?
“Soggy politics and an ineffective opposition means UK risk assets still are for the brave (or foolhardy).”