Even the world’s biggest money manager is puzzled when it comes to the outlook for Brexit negotiations.
“It’s impossible to predict the outcome,” Nigel Bolton, head of the European equities team at BlackRock Inc., said at a London briefing on Tuesday. “We’ve taken a relatively neutral stance because we have no idea where this is going to ultimately end up.”
U.K. stocks and the pound have whipsawed on Brexit developments, with both sliding on Monday after Prime Minister Theresa May delayed Parliament’s vote on her divorce deal. The FTSE 100 Index is down about 12 percent this year and has lost more than 8 percent in U.S. dollar terms since the 2016 Brexit vote, whereas European, U.S. and Asian benchmarks have all shown positive returns.
British domestically oriented shares have been particularly vulnerable to the sell-off, and BlackRock’s Bolton believes that if there’s no deal or a “bad” Brexit, these stocks could lose another 30 percent, and their earnings would be “significantly” hurt.
Within its European portfolio, BlackRock is slightly underweight U.K. stocks but isn’t taking a “very big bet” on the country while uncertainty persists, according to Bolton. Within Britain, the money manager is overweight on companies with international earnings since they win from a weaker pound, and is strongly underweight the domestic stocks.
No-Deal Brexit
The uncertainty surrounding the nation’s exit from the European Union is hurting the outlook for equities in the region as a whole, said Bolton. BlackRock is underweight on European stocks in 2019 due to political risks, which also include Italian, French and German government concerns, as well as due to muted earnings growth.
After Prime Minister May announced she would defer a vote and return to Brussels to seek “assurances” from the EU, the pound hit the lowest since April 2017 as the market judged that the risk of no-deal Brexit had increased.
“We do think that a no-deal Brexit is a very low-probability outcome, but it’s non-zero,” said Richard Turnill, global chief investment strategist at BlackRock. “Many of those outcome scenarios are unlikely to lead to significant clarity on what the U.K.’s long-term relationship with Europe is going to be, and that uncertainty and the premium charged for investing in the U.K. may well persist for some time.”
But if anything is certain, it is that 2019 is going to be another wild ride for U.K. investors.
“One thing I’ll guarantee is there’s going to be volatility in the U.K. equity market in 2019, depending on what political route we end up with,” Bolton said.