Although pro-Leave supporter Boris Johnson having been crowned leader of the Conservative party and, as such, the next prime minister, it is still difficult to plan ahead for a post-Brexit environment, according to Kames Capital’s Sandra Holdsworth and Steve Jones. 
Whilst Johnson’s appointment will see a hard Brexiteer take over the talks, there are still a number of outcomes that could evolve.
This is particularly challenging for the bond investors, said head of rates Holdsworth, who noted that the Bank of England is assuming a deal is struck and that investors return to the UK.
“But what we have realised [instead],” said Holdsworth, “is that there’s quite a lot of scenarios with quite a large range of outcomes.”
She added: “Other potential outcomes are that the [31 October] deadline is missed – entirely possible but not very likely at this stage given the rhetoric that is coming out of Boris Johnson’s camp.
“And then on the other side is this more chaotic type of outcome – a ‘no deal’, a general election, a second referendum – all of which would lead to further uncertainty, stretching out to where the whole outlook for the UK economy, the eurozone economy and future trading relations all remain pretty uncertain and pretty much as we are now or worse.
“So, we only have one scenario which is a positive for the UK.”
Leading up to Boris Johnson’s victory, Holdsworth said the Bank had to realign its positioning on Brexit, given the decline in business confidence of certain sectors.
Source: ICAEW
Immediately after the 2016 EU referendum there was a drop in domestic and international business confidence, she explained. It did revive somewhat when it was realised that carrying out Brexit would not happen anytime soon.
But now the Kames head of rates said the continued uncertainty after Theresa May’s failure to seal a deal by the 31 March deadline and a potential ‘no deal’ under Johnson has seen confidence fall again.
What this means is that while in the past when faced with an economic recession – as many have forecasted in the event of a ‘no deal’ Brexit – it has been able to cut interest rates this time it might not be able to.
Indeed, interest rates remain at historically low levels more than a decade on from the 2008 global financial crisis as a part of measures to shore up the financial sector and return the economy to growth.
Source: Bank of England
“And this is shared by central banks worldwide,” Holdsworth added: “It’s worth reiterating the point that with this central bank ammunition [although] there’s not a lot that they can do but they can do something.”
Looking at what this environment means for equity investors Steve Jones, chief investment officer for Kames Capital said that there is a lot of stockpicking opportunity at the moment.
“There is a massive amount of stockpicking to be done in that area,” he said.
“Clearly anything to do with the auto supply chain is under immense trading pressure and uncertainty from the Brexit scenario, but also the reorientation towards the revolution in electric cars. Those are just profit warnings after profit warning.”
He added that anything to do with retail was “awfully positioned” to deal with the Brexit uncertainty.
But infrastructure he said looked to be a more promising sector, since: “It’s not as if we don’t have a natural ongoing demand for housing.”
Looking ahead to after the Brexit deadline, Jones said that even though global diversification is one course of action, he advises that investors look closer to home for opportunities after the Brexit situation is given some finality.
“If it does end up in a more stable scenario into transition then we can see quite a big bounce in some of those local things that we’ve been selling for quite a while now,” he said.
“Despite all our intrigue and the undoubted ‘fasten your seatbelts’ ride to come politically in the UK, I don’t think that you can ignore the fact that global monetary policy has changed dramatically over the last six months,” he said. “And that supports all scenarios other than a Jeremy Corbyn-type situation.
“A higher allocation to bonds and ongoing acceptance of risk assets in portfolios relative to cash, is actually quite a painful concoction for people who are caught up in the short-term political uncertainty which we undoubtedly do face and will undoubtedly experience,” Jones added.
“But actually markets are racing away and being supported by even bigger structural changes. Whilst it may seem counterintuitive, you need to take some of that bravery and put it into markets in general.”