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Portfolio > Portfolio Construction

A London Fund Manager Explains the Realities of Brexit

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A fund manager from London-based investment house J O Hambro Capital Management shared his on-the-ground view on the reality of Brexit during a recent media event in New York.

Calling into the event from London, Clive Beagles discussed what’s happening regarding Brexit and the implications of such.

Beagles is co-manager of the JOHCM UK Equity Income Fund and one of the U.K.’s most highly respected equity income managers. J O Hambro is an active asset management company with $35.2 billion in assets under management, including about $12 billion in its growing U.S. business.

“Here we are, nearly three years on [since the Brexit vote], and effectively very little has happened,” Beagles said.

The U.K. is scheduled to leave the EU on March 29.

According to Beagles, Prime Minister Theresa May looks determined to pursue a strategy of brinkmanship. However, “for the moment, Parliament hasn’t agreed to anything,” he added.

Beagles said the next “most important date” to watch is March 12, when there is a parliamentary vote on May’s deal.

If May loses that vote — which Beagles thinks is the “most likely outcome” — there would be another parliamentary vote the next day to decide whether they want the U.K. to exit the EU without a deal. According to Beagles, it’s unlikely they’ll get the vote for that, either.

If Parliament rules out a “no deal” Brexit, it will vote on March 14 to delay the exit process. “That could easily be delayed by three months or maybe even longer,” according to Beagles.

At the moment, Beagles thinks the most likely outcome is an extension of the negotiation period.

Beagles also said that a second referendum is still a possibility at some point, noting that the opposition Labour Party now supports a second national vote.

Already, the uncertainty surrounding the U.K.’s exit from the EU is having consequences.

According to Beagles, uncertainty means the U.K. stock market is loathed by investors.

Effectively, no one likes the U.K. market and no one owns it,” he said.

For example, the valuations of the U.K. market price-to-book relative to the global market is at a “big, heavy discount,” according to Beagles.

Beagles also looked at Bank of America Merrill Lynch’s fund manager survey, which includes a question asking people it they’re overweight or underweight in the U.K.

“They’re universally underweight, a situation that has got only bigger in the last three or four years,” he explained. “You can see that it’s certainly a very unpopular market here in the U.K.”

The pound sterling also looks very undervalued, and Beagles thinks it could easily rally 10% or more on any kind of resolution.

But the U.K. economy has been “remarkably resilient” despite the difficult backdrop, Beagles says.

At 4%, U.K. unemployment is at its lowest level since 1975. In addition, job vacancy levels are at an all-time high.

Beagles said that “unsurprisingly” wage growth is accelerating — and at 3.4% is at its highest level since the financial crisis.

But, at the same time, business confidence has deteriorated.

“People got fed up with the long, drawn-out Brexit negotiations that have had a lack of clarity,” Beagles said.

Consequently, interest rates have been on hold despite the lack of spare capacity.

“If we hadn’t had this Brexit uncertainty, economic growth would have been stronger, and the central bank here would have been raising rates in a similar fashion to what’s been going on in the U.S.,” Beagles said.

As a result, according to Beagles, GDP growth has probably been a cumulative 2% lower than it would have been since mid-2016.

However, he also notes that while U.K. GDP growth has slowed further in the last three months, it is still running above most of Continental Europe.

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