UK: uncertainty around Article 50
Despite the dramatic events of this year, Lazard UK Omega fund and head of UK equities, Alan Custis, believes 2017 promises to be somewhat more measured. However, he noted the expected invocation of Article 50 before the end of the first quarter could affect the domestic economy in terms of additional fiscal stimulus to counter balance weaker consumer spending.
“From a sector perspective, we think the rotation we have seen out of staples into more cyclical elements of the market will continue as interest rates start to see some upward pressure and inflation also picks up,” he said. “While UK GDP expectations have recently been crimped, we see global real GDP returning to levels close to their long term average.”
He added: “In this scenario we would expect to see resource names more likely to maintain the performance they achieved during 2016. We are also constructive on the financial sector, as yield curve and Libor rate movements offer a more favourable backdrop than we have seen for some time.”
For Russell Investments, the critical question is over whether the UK ends up with a hard or soft Brexit because of the heightened economic and financial disruption if the UK experiences the former.
The firm believes the risk of a UK recession has declined, but it expects growth to slow significantly, predicting a rate slightly below consensus of between 0.8% and 1.2%.
Sturkenboom said: “All in all, the forces pulling the UK back from a hard Brexit are every bit as formidable as those pushing towards it. Unfortunately, for now we simply have to wait and see how these competing forces play out.
“While equity valuations remain slightly cheap, we are maintaining a small underweight position in UK equities. For fixed income investors, they should take note of the balance between near term oversold sentiment signals and medium term slightly expensive valuations.”
Legal & General Investment Management (LGIM) head of economics, Tim Drayson, said the UK economy had been surprisingly resilient following the Brexit vote, but the consequences of the subsequent fall in the exchange rate could be felt more strongly during 2017.
He added: “As inflation rises, real incomes will come under pressure and consumer spending should soften. We also expect weak business investment and less employment growth as uncertainty around the UK’s future relationship with the EU leads to a deferral of expansion plans.”
