This week saw Boris Johnson anointed as UK Prime Minister. While he wants to defy 'the doubters, the doomsters and the gloomsters’, expectations for an incoming Prime Minister can seldom have been lower.
- Johnson’s accession makes a no deal significantly more likely
- This continued uncertainty is likely to be the worst outcome for UK assets.
- The argument for holding UK assets is still unclear
Johnson brings the potential for the hardest of hard Brexits. He has assembled a cabinet of hard Brexiteers, leaving out moderating influences such as Jeremy Hunt or Philip Hammond. As intended, it sends the strongest possible message to Brussels that he is willing to pursue no deal unless he is offered a better deal.
It is tempting to believe that this determination will bring a welcome resolution to the Brexit uncertainty on 31 October. This, in turn, would shore up British assets. However, this seems unlikely. A ‘no deal’ is more likely to condemn the UK to protracted negotiations for years into the future as we renegotiate all the trade deals with Europe. There will be uncertainty over the survival of the Union. This continued uncertainty is likely to be the worst outcome for UK assets.
While braver value managers have gone into cheap UK assets, they have no yet had their bravery rewarded. Jason Borbora-Sheen, co-portfolio manager on the Investec Diversified Income Fund believes there will be a buying opportunity once there is more clarity over the Brexit outcome, but now is not the time. In his view, Boris Johnson’s appointment as the next Prime Minister increases the likelihood of a no deal, which in turn is likely to cause Sterling to weaken and will hurt the UK’s near-term growth opportunities. With this is mind, he isn’t going near UK domestic companies just yet.
“We hold only limited exposure in the UK while the uncertainty persists and (look to) balance international and domestic exposure, leaving us less vulnerable to the shifting sentiment around Brexit.”
That said, sterling remains little-changed on news of the new PM. This at least suggests that a ‘no deal’ outcome is factored into prices. This may imply that things can’t get significantly worse. However, the political climate remains very unsteady in the UK and it is difficult to see how stability will emerge in the short-term. With this in mind, there is no catalyst for a turnaround in UK assets.