The prospect of a so-called “hard Brexit” and U.K. Prime Minister Boris Johnson’s machinations to exit the European Union have promptly sent British assets into a tailspin. The prime minister is seeking a snap general election as parliament voted Tuesday to block his Brexit strategy.
U.S.-based investors continue to find the whole affair head-spinning.
“This is a mess. You can't forecast the outcome of a mess,” said David Kotok, chairman and chief investment officer at Cumberland Advisors. “You can use chaos theory; it's fancy math. At the end of the day, it doesn't tell you what to do next Tuesday.”
On Wednesday the British pound rose on politicians voting to seize control to block no-deal Brexit, one day after it touched its lowest since 1985 before rebounding. The U.K.’s benchmark FTSE 100 Index (^FTSE) has risen 15% since the vote to exit the European Union on June 23, 2016, but that compares with a 38% gain in the S&P 500 (^GSPC) in the same period. Meanwhile, the FTSE yields 5% in contrast with 2% for the S&P 500.
That’s too attractive to pass up for some investors, mess notwithstanding. Michael Grant, Calamos Investments’ co-chief investment officer, said it’s unlikely that the most dire predictions for Brexit come to pass.
“Leadership will still matter, but longer term, there's no reason why Britain cannot succeed in economic terms,” said Grant. “There's a lot of aspects to the debate that are political, but purely in economic terms I think the U.K. economy will be just fine.”
“The European Union is a sort of protector of a stagnant status quo. One of the reasons why the European Union is the worst performing major economic region in the world is because it has low productivity driven very much by the policies of the European Union. So breaking away from that regulation and that tax policy is, sort of, like receiving a get out of jail card free in economic terms,” he said.
Then there’s the valuation. The FTSE is trading at 12.7 times estimated earnings, compared with 17.6 for the S&P 500, according to Bloomberg data. Grant said that’s pricing in a scenario of “economic suicide,” which is not likely to happen.
“British Sterling-based equities are pretty much the cheapest asset in the global equity world today. Most of the studies show they're the most underweight asset within the global equity universe,” he said.
Counting on the US economy
“I'm not interested in the U.K. I am interested in the U.S.,” he said. “And if the world is evolving so we're going to have regional fortresses in an economic context, which is what the Trump trade policy's leading to — we're going to be in one, Canada, Mexico, and the U.S.” He’s making an investment in the “vibrancy of the U.S. economy and entrepreneur.”
In the short term for the U.K., chaos appears to be the rule. Kit Juckes, global fixed income strategist at Societe Generale, noted in his Tuesday morning commentary that the pound and euro were both declining, and was bracing for more volatility.
After recapping the latest developments, he characterized it as “48 hours of heightened uncertainty that may well lead to a further 6 weeks of heightened uncertainty.”
Julie Hyman is the co-anchor of On the Move on Yahoo Finance.