LONDON (Reuters) - Britain’s biggest asset manager, Legal & General Investment Management, is wary of making a call on sterling’s next move due to uncertainty over the outcome of Brexit, though it expects domestically-oriented UK shares to enjoy some brief gains.
Chief Investment Officer Sonja Laud, who oversees more than 1 trillion pounds ($1.3 trillion), also said the firm had cut global equity allocations in its funds to underweight due to a range of factors, from lacklustre company earnings to weaker global growth and the risk of populist government policies.
In Britain, Prime Minister Boris Johnson has called an election on Dec. 12, having failed to get parliament to pass his Brexit transition deal, and a sterling and equity rally sparked by hopes of averting a disorderly no-deal Brexit has stalled.
“I wouldn’t take a position on sterling at this point,” Laud told the Reuters Global Investment Outlook Summit. “Sterling is really is a binary bet and no client would want you to take a binary bet. You’d have to tell your client we know what will happen, but we don’t.”
“You have to understand what you buy into, and the currency is a bet at this point ... It’s not worth taking that risk.”
While the Brexit deadline has been extended to Jan. 31, Laud said markets had not sufficiently thought through what would happen after then, as the clock ticks on down on a possible transition period and Britain holds trade negotiations with the European Union and the rest of the world.
“We don’t have a deal, we just have a divorce and let’s face it, a free trade agreement is equally fraught with problems and forks in the road,” Laud told the London leg of the summit.
Equities are a better bet if Brexit happens with a deal, she said. The FTSE-250 index, consisting mostly of companies such as retailers and developers, rose after Johnson agreed his deal with the EU, yet still trade around 15 times forward earnings - well below most global peers.
“There are still a few really good (UK) companies that it might be worth hanging on to,” Laud said. “(Domestic stocks) are incredibly cheap so might see a bounce.”
“But longer term, I wouldn’t bet on a prolonged rally .... reality might kick in when we have the first roadblock in terms of negotiations.”
She said it could take as long as 3-4 years to reach a free-trade agreement with the EU.
Brexit was seen as part of a global backlash against rising income inequality. Recent street protests across the world, from Hong Kong and Paris to Beirut and Santiago, are raising fears that governments will loosen purse strings to placate voters.
“The market is not factoring in that this could lead to more drastic changes, with more drastic economic policy changes,” Laud said, adding the fund had downgraded equities to underweight in global allocations.
“We downgraded it because the S&P500 is at an all-time high, markets are betting squarely on central bank support and that inflation is not coming back and that the political backdrop will remain stable,” she added.
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Additional reporting by Elizabeth Howcroft; Editing by Mark Potter