Brexit consensus remains harder to find than Boris Johnson’s barber but this week's passing of legislation preventing a no-deal Brexit has “emboldened” a leading global investor.
Tyler Mordy, president and CIO of Forstrong Global, has just returned from Europe, where he spent time on the ground in Ireland and other countries gauging opinion on a political saga that has dogged the global economy since the UK voted to go it alone more than three years ago.
He said the mood in Dublin – and London - is one of fatigue, with many feeling the “hand of history on their shoulders” with regards to the border separating Northern Ireland and the Republic of Ireland, and the two countries’ bloody history and hard-won peace.
Mordy puts Brexit among the most anxiety-inducing global risks, along with the Hong Kong protests, Iran tensions, potential policy mistakes and bond markets being priced for “eternal stagnation”.
The UK’s protracted divorce from the EU is arguably the most unfathomable for the macro investor but there is now a shard of light for investment professionals after parliament defeated UK Prime Minister Johnson by blocking a no-deal rupture. While this doesn’t necessarily make the UK or Europe a more attractive place to park your money, it does increase Mordy’s confidence in better long-term macro stories, like East Asia.
He explained: “The pound has rallied hard the past few days and a lot of people are perplexed by that. But if you go through the logic of everything, the probability of a no-deal rupture is very low now. That means one of the major global risks has receded and, ultimately, will act to raise overall risk appetites."
As a global portfolio manager, Mordy and his team now have to weigh up whether they opportunistically target the source of the conflict, in this case the UK, or look more broadly.
He added: “We're closely reviewing our position in the UK and whether we go to an overweight stance or not, but it’s one of the risk factors that has emboldened us to go into the areas where we think the longer-term macro stories are better. That’s not found in the UK, unfortunately, but more so in the East Asian emerging markets.”
This chimes with Forstrong’s overall strategic stance – that the risk of a global recession has receded and that economic indicators are actually turning upwards in many countries.
Mordy also cited the “skyrocketing” numbers of banks now easing monetary policy and the repricing of oil as reasons why the world economy is in better shape that the pessimists suggest.
He said: “The slow patch in many parts of the world is likely behind us already. However, this excludes the United States, which is still facing downside momentum as tailwinds from last year's fiscal stimulus fade."
Johnson has, it seems, overplayed his hand in seeking a do-or-die Brexit and then a snap election, which were both voted down by MPs. Now, having declared he would rather be “dead in a ditch” than seek a further delay to Brexit, he has to negotiate a deal with so-far unflinching European officials in Brussels on October 17. The odds do not appear good.
But whatever the domestic consequences for the UK – and there are many – the elimination of the threat of a hard exit over the medium term is a source of encouragement for global investors.
“If you go through the various scenarios that could unfold at this point, Brexit has a 50-50 probability that it won’t ever happen,” Mordy said. “You can adjust that for some wishful thinking, but there will likely be a Brexit or a soft Brexit, which could include things like membership in the EU's customs union and single market.
“Under this arrangement, the UK would likely enter an endless sequence of temporary arrangements, similar to the EU's relationships with Norway and Switzerland, which are now approaching their fourth decade. But the thing that matters most is we have eliminated the threat of a hard deadline for now."
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