Investors shouldn’t rule out a second referendum on EU membership in the event of a ‘no deal’, hard Brexit, according to Royal London Asset Management’s Trevor Greetham.
Despite prime minister Theresa May’s recent assertion that 95 per cent of an exit deal has been completed, question marks remain over several key issues.
As such, many international investors have continued to shun UK equities given the lack of clarity over the outcome of negotiations and potential for a hard, ‘no deal’ Brexit.
Uncertainty over the future relationship between the EU and the UK has weighed heavily on domestic stocks which have lagged their international peers.
Since the referendum in June 2016, the FTSE All Share has lagged its global peers, returning just 19.52 per cent compared with a 40.43 per cent gain for the MSCI AC World index.
Performance of indices since EU referendum
Source: FE Analytics
While markets often have to deal with uncertainty, Royal London’s Greetham (pictured) says Brexit has its own specific challenges. 
He said: “It’s not unusual for markets to have to process uncertainty but at the moment it’s very plausible that we leave the EU with no deal, that may mean no transition deal – so an abrupt cliff edge [for investors] in March.
“It’s also, in my mind, very plausible that we have another referendum and end up staying in the EU.”
Greetham added: “The more likely a no deal outcome becomes, the more likely it is that Parliament takes back control from the government and – being deadlocked as it is – then decide to put it back to the people.
“Theresa May has pretty much already said that. Asked about the prospect of a no deal and what would happen, she said ‘well, in that situation, Parliament would have a say’.”
The binary outcomes of a hard Brexit or a second referendum would also have a significant impact on sterling, given the performance of the currency since the EU referendum.
Indeed, Greetham – who oversees Royal London’s Global Multi Asset Portfolios (GMAP) range – said sterling would likely move within a 30 per cent range by next summer, depending on the outcome.
Performance of US dollar & euro vs sterling since EU referendum
Source: FE Analytics
“If we have a ‘no deal’ Brexit I think the pound is down by 10 or 15 per cent. If by some turn of events we end up staying in the EU or a soft Brexit-in-name-only, the pound goes up 10 or 15 per cent,” he said.
“How do you plan for that? My answer is don’t bet on one particular outcome, because sometimes the more likely one extreme becomes, the more likely the other extreme becomes.”
The multi-asset manager added: “People call it bimodal distribution in probability language: the more likely no-deal becomes, the more likely we stay in the EU and they have very different impacts on the pound and it will all be decided by politicians behind closed doors.”
One thing that Greetham is not too concerned by is another general election that some had considered likely if May were to lose support for any deal.
He said the provisions of the Fixed Term Parliaments Act require a two-thirds majority of MPs to vote in favour of fresh elections before the end of a full five-year term.
While it was conceivable that May could lose a key vote and be replaced by another Conservative MP, it was unlikely that a change of government would come about.
“It’s very hard to imagine that there is a sufficient majority in parliament who want a general election and in that case there could be a lot of political turbulence,” he said. “I would be very surprised if there was a change in party leadership.”
Regardless, Greetham said a change in government would not result in a change in approach to Brexit.
“The Labour party is treading a slightly thin line on Brexit,” he explained. “They have the luxury of being in opposition but when I look at it they’re talking about having all the benefits of the single market without being in the single market, which is remarkably similar to government policy.”
He added: “I think both parties are very split on Brexit, the country is split, the cabinet is split there’s a split between the cabinet and the DUP. How do you get out of it?
“I think ‘no deal’ is not the best outcome so you could put a low probability on it, but the concept that Parliament takes control and calls another referendum could be one way to unblock the situation.
“In that situation it would be either do you want to extend the period for negotiations, do you want to remain in the EU, do you want to leave with no deal; there are many permutations of how that referendum might work. This just emphasises the fact that there are so many different outcomes.”
As such, the manager said investors should concentrate on hedging risks rather than trying to position for one particular outcome.
Low-risk investors should ensure they have plenty of sterling exposure within their portfolios, with Greetham adding that UK equities should be included within their overseas exposure – given that large FTSE-listed names often derive much of their income from overseas.
2016 performance of indices post-EU referendum
Source: FE Analytics
Another move that investors should consider is balancing out equity exposure with property given their lack of correlation following the referendum.
“Property and equities moved in opposite directions in 2016 when the referendum happened,” he said. “I think they will move in opposite directions over the next six months. It gives you some degree of stabilisation.”