Will UK markets sink or soar post Brexit?

As the UK officially exits the European Union, five investors contemplate the implications for UK markets.

Quentin Fitzsimmons, fixed income portfolio manager at T. Rowe Price

The UK is finally leaving the EU. However, its negotiations with the EU on the shape of the future trading relationship introduce new uncertainties. Prime Minister Johnson has committed to no extension of the transition period, but the timeframe for achieving a trade deal is very short. Some of his MPs will watch like hawks to make sure he does not give away too much; on the other hand, his large parliamentary majority allows him flexibility.

The challenge facing the UK is to balance its trade deal negotiations with the EU by optimising gains it seeks elsewhere with new trade deals, notably with the US. This means 2020 will continue to offer little certainty on the longer-term direction for the UK economy – something investors do not like.

Phil Harris, manager of the UK Equity Growth Fund at EdenTree Investment Management

After three years of political uncertainty, multiple elections and constitutional confrontations, today the UK officially leaves the EU. For UK equity markets, the election of a majority government with business-friendly policies has already unleashed a rally in UK-focused stocks and we expect more to come as investment decisions that were delayed are reactivated.

With interest rates low and falling, unemployment at record low levels and pay increasing, the stage is set for a substantial rebound in consumer confidence. 2020 should see the UK significantly increase its growth rate, particularly versus Europe. We believe the historic de-rating of UK stocks is over and are increasingly confident in the outlook for the economy and UK equities.

Rogier Quirijns, portfolio manager of the Cohen & Steers European Real Estate Securities Strategy

We believe prime areas, such as the City of London and Mayfair, might benefit in the short term from some kind of relief rally. However, over the longer term, London offices should feel the impact of the exit from the European Union. London has been a major beneficiary of the growth of the EU over the past three decades but will likely stagnate over the coming ten years.

The areas we remain more bullish on in the UK are logistics and alternatives, such as retirement homes and healthcare properties. Crucially, there is limited tenancy risk, coupled with sustainable yields, because the assets are supported by rental growth and secular demand is positive.

James Thornton, CEO of Mayfair Capital

In the short term, the removal of the no-deal Brexit risk should enable confidence to return to the UK, leading to stronger growth. We expect higher GDP growth and continued high employment, as well as greater public spending announced this year, which will include additional infrastructure funding – one of our core investment themes.

All of these factors will support occupier demand and improve real estate investment liquidity. We do not believe a higher sterling will deter foreign investors who have been more concerned by the political uncertainty in the UK. Ultimately, property returns are correlated with economic growth. However, the medium-term risk of the UK crashing out of the EU remains.

Calum Bruce, investment manager of Ediston Property Investment Company

The implications of leaving the EU remain the biggest unknowns at the moment. The UK property market will be impacted in some way and there is no consensus view as to what will happen. The market continues to experience lower transaction volumes. Political uncertainty has acted as a brake on investment activity, as investors seek clarity on the key issues before making investment decisions. This inertia is likely to persist until the political landscape alters.

However, the investment market is not dead. Deals are happening and there is price discovery across subsectors. Assets that are well-located, trade well and are let off affordable rents are more desirable. For example, we are optimistic on the attractive yields available in the retail warehouse market.

This was also featured in Investment Week.

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