Top economist believes market has been too downbeat on country and that chance of a no-deal Brexit is now slim
Investors have been warned not to pull out of the UK despite the ongoing uncertainty over Brexit.
Britain’s decision to leave the EU has become a long-running saga, like a overwrought seven-series boxset, and with all the thrills of a migraine.
However, the doom and gloom that has engulfed the UK market has, to some extent, been misplaced, according to Peter Westaway, Vanguard’s European chief economist, who compared Brexit to Lemony Snickett’s A Series of Unfortunate Events.
Speaking in Toronto, Westaway told WP there was short-term and long-term answers to whether investors should go anywhere near the UK given the mind-boggling permutations and recriminations that have dominated the process of exiting the EU.
In doing so, he put forward the probability of four main scenarios and believes that one of them, a no-deal Brexit that would see the UK revert to WTO tariffs and likely enter a recession, now has about a 5% chance of happening given Theresa May’s decision this week to give Parliament a vote to rule out a no-deal and get a delay.
Westaway said: “The market has got very downbeat about the UK recently. In our view, more downbeat than it should be because I think the chances of a no deal are actually relatively small. Even though a lot of people are talking about it, a lot of that is posturing.”
He said a compromise Brexit – May’s deal – has about a 50% chance, while the prospect of a second referendum and no Brexit has shot up to 25% probability. A “soft” Brexit, Norway-style with the UK staying in the customs union is now at 20%, leaving no-deal as by far the least likely.
For investors to be deserting the UK, therefore, would be ill-advised.
He said: “To be tactical … pulling out of the UK is the worst thing you could do because on the basis of my probabilities, I’d say if anything the market has got too down on the UK at the moment. There is probably more upside risk and more upside potential for what could happen next than is perhaps appreciated.”
For the long-term solution, Westaway leans on the Vanguard philosophy of maintaining a globally diversified portfolio. Predicting political developments and their impact on the market is a “mug’s game” and he pointed to US President Donald Trump’s election as a prime example.
He said: “Brexit and Trump provide great examples of where you thought you knew what the market was going to do after the result. Few predicted that Trump was going to win but if you had done, you probably would have predicted the market going in the opposite direction.
“It’s difficult to predict winners. People in the UK, for example, who are massively overweight UK, have obviously lost out. Our clients who had global assets actually benefited from Brexit in the short run because Sterling went down and foreign assets went up.”
