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Investor flows should warn May against ‘no-deal’ Brexit

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By Sam Kerr
18 Dec 2018

Investors are moving to abandon UK assets in record numbers as the country’s government continues to stumble towards a calamitous no-deal Brexit. The government should take notice and reverse to avoid disaster.

According to data from EPFR global, net flows out of UK equity funds year-to-date were $13.74bn, a record figure, the previous worst being the $11.9bn pulled from UK funds in 2016.

Total outflows from UK equities were less severe but still totalled almost $6.5bn of cumulative outflows year-to-date.

Separately, Bank of America Merrill Lynch's fund manager survey for December, released on Tuesday, revealed that 39% of respondents are now underweight UK equities — the second largest underweight for the UK on record, the largest being earlier in 2018 when the UK’s negotiations with the EU looked to be at a total impasse.

Survey data which tracks investor’s long and short positioning when compared with historical levels, showed that UK assets are now the most unpopular investment the survey measures.

Bankers speaking to GlobalCapital throughout the autumn have said that new UK equity listings are effectively frozen until markets know what is going to happen on March 29, the UK’s scheduled exit from the EU.

IPOs tend to be dependent on medium and long-term perception of risk and volumes can be severely impacted by domestic political and economic pressure, as seen in Turkey, Russia and Italy this year.

For Europe’s most efficient IPO market, the UK, to have issuance so curtailed, shows how nervous investors are around Brexit and the situation has gotten worse as the clock has ticked on with a no-deal exit still on the table.

Despite the dire warnings about such a resolution to the Brexit process, many of them coming from the UK government, this scenario even seemed to become more likely on Tuesday with reports that UK Prime Minister Theresa May’s government is now accelerating its no-deal preparations.

Nevertheless, investor unhappiness about this scenario should serve as a warning to the hard right of the UK’s governing Conservative Party that markets have little faith in the country’s future should the government let it to come to pass.

GlobalCapital has argued in the past for the UK to retain as strong a relationship with the European Economic Area as possible after next March.

Not only would closer ties benefit the City of London and the country’s vitally important financial services sector, but it would be beneficial for Europe as a whole for its financials system to remain as un-fragmented as possible.

The concerns over the UK leaving the European Union without a deal however, are far more fundamental then worries over a weakened City.

A no-deal Brexit could severely damage the UK economy and risks a recession at a time when the country can ill-afford one.

Investor flows are apolitical and funds are not positioning against the UK because of a dislike for Brexit as policy or because they want any particular kind of Brexit. Investors fear a long position in UK risk will lead to them losing money.

They may be wrong, as investors sometimes are, but a huge consensus is building against Brexit Britain by those being paid to take and analyse risk, and that should be enough of a warning.

If this is a ruse by the prime minister to scare the House of Commons into voting for her unpopular withdrawal deal, which while approved by the European Union, is unlikely to secure a parliamentary majority, it will be costly for UK equity and bonds.

If it isn’t, and the Prime Minister is genuinely planning on driving Britain over a cliff-edge to satisfy the hard right of her own party and what she imagines is the “will of the people” expressed during the 2016 referendum, then she can hardly say she wasn’t warned should calamity follow.

Mrs May must rule out the possibility that the UK will crash out of the EU without an agreement, to save not just investor perception of the UK, but perhaps even the UK itself.

By Sam Kerr
18 Dec 2018