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Hard, soft or limbo: the investment view on Brexit

Published by Alex Pocock on

Sympathy is not a word most reach for when describing how they feel about investment managers.

But spare a thought for the asset manager community. Trying to make sense of the current whirl of domestic and world politics to shape its impact on markets is a character-builder, to put it mildly.

No sooner does one scenario materialise then it melts away - difficult stuff.  But the feedback from our conference attendees is that they appreciate the slot where we aim to bring big-picture economics to life.

Cue Azad Zangana, senior European economist and strategist for Schroders. He confidently led the audience through principal scenarios.


What kind of Brexit can we expect, what impact would a trade war between China and the US have and how likely is it that America is heading for a recession this year? 

His take (at the time of speaking) was: “Our view is that, when push comes to shove, the UK will vote for the (May) deal on the table.”

Notwithstanding that, he said there was a “40 per cent” chance of no-deal, compared to the bookie’s odds of 16 per cent. Who would you put your money on? A loaded question if you are a trustee - Betfair or a venerable investment house? 

Soft, hard or limbo (dragging on forever with no resolution) were the main options. He also told us that, having taken it out of his talk six months ago, he had put the “Remain” option back. A bit like MPs?

Sterling remained the most robust measure of what impact each of these options would have. Significant further depreciation remains a risk if there is no deal but an approved deal could spell a rally in the value of the pound.

General uncertainty about the outcome was also reflected in other economic indicators. Household savings reached a record low in 2016 but household spending is what drives the UK economy and there are signs it slowed in 2017.

Our view is that, when push comes to shove, the UK will vote for the (May) deal on the table.
Azad Zangana

House-builders offering discounts such as paying stamp duty is also now at a level last seen a year before the credit crisis. Falling prices mean lower valuations

And while a no-deal would see a cut in interest rates, more people in jobs - and wages rising - would present a need over the longer term to raise them to curb inflation.

Meanwhile, on the other side of the world. Nearly one-fifth of China’s GDP is earned through export, of which the US buys one-fifth, half of which will now cost more because of the trade war.

Azad saw two different strategies: China’s long-term drive to be a global superpower (evidenced by its mammoth “Belt and Road” investment programme) compared to the US’s short-term push to stop cheap imports and to protect intellectual property rights from being stolen.

But the context of higher debt and slowing growth in China and the US economy creaking this spring as the growth cycle stalls - with the next step a potential recession in America in 2020 - raises further risks for the global economy.

While economics might still be uncharitably termed as the “dismal science”, this session was anything but as Azad deftly moved from illustrated theme and analysis to potential outcome and impact. We can only look forward - with genuine curiosity - as to what next year’s talk will contain.

Want to reduce currency risk? Maybe invest more overseas

Ian Mills, Associate, thinks about currency risks and where to invest assets ahead of Brexit.

About the author

  • Alex Pocock

    Alex heads up our Investment Consulting practice and is responsible for setting the direction for the firm’s approach to investment for our clients. He has developed a leading team of consultants dedicated to exceeding client needs whilst maintaining a close, personal involvement with client issues through his portfolio.

    View Biography

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