Uncertainty over Brexit has had a knock-on effect on the economy with many businesses holding back on investment until they know more about the future relationship the U.K. will have with the EU — its largest trading partner as a bloc.
Robust GDP (gross domestic product) growth of 0.5% in the first quarter was seen as down to an uptick in production and stockpiling of goods and components before an original Brexit date of March 29. But second-quarter GDP is set to reflect a wider malaise and hesitation over investment, largely caused by Brexit.
For one, Capital Economics’ U.K. Economist Thomas Pugh issued a note earlier in July noting that “the economy probably just about contracted in Q2 (the second quarter) as a whole. Some of that is just payback from activity being brought forward from Q2 into Q1 ahead of the original Brexit deadline of 29th March. But there’s a growing risk that the underlying trend is slowing too.”
Sterling has also weakened almost 4% against the dollar in the last three months, trading at $1.2481 on Monday morning. Some investors are very nervous about the U.K.’s near and long-term economic future while others are more confident the U.K. will be able to recover, eventually.
“We think the U.K. is almost uninvestable until we have much better clarity about what’s going to happen going forward,” Paul Gambles, co-founder of the MBMG Group, told CNBC’s “Squawk Box Europe” Monday.
“It’s (the pound) not at bargain basement levels yet, we’d need to see the pound dipping to $1.20 or below that,” he said. “We’re not seeing any end to the weak pound scenario unless something changes dramatically.”
Tapan Datta, the head of global asset allocation at Aon, was more sanguine on U.K. investment, saying “I think the opportunities are there providing you can take a view through this Brexit imbroglio.”
“If you’re working on the idea that somehow a deal can be arrived at over the next 6 to 12 months — though it doesn’t look like it’s going to happen by October, frankly — there are certain parts of the U.K. equity market that look really deep value at present,” he noted, saying more domestically-sensitive cyclical stocks (whose performance typically follows economic trends) that “had been beaten up” during Brexit negotiations were an example of potential value.
“You can arguably take a view on sterling too because at $1.24/$1.25 is low, and arguably significantly under-valued. So if you’re prepared to take that view, you might lose a bit of money near-term, but if you’re prepared to sit it out for a couple of years you could be sitting on a 10% plus gain,” he told CNBC’s “Squawk Box Europe” Monday.
“So, I would disagree that the U.K. is uninvestable, it’s just that the near-term uncertainties are very considerable.”
UK set for a new prime minister as Brexit chaos rolls on – CNBC