Investment managers have said a Brexit downturn could be “another brick on the load” to an existing list of events that are likely to slow global growth in 2019 and 2020.
Some economists have argued that the US could face a recession in H2 2019, just after the UK crashes out of the EU.
Dave Lafferty, chief market strategist at Natixis Investment Managers, says: “We consider a messy Brexit to simply be additive to a long list of events that are likely to slow global growth in 2019 and into 2020.
“US monetary policy will finally begin to bite as the real Fed Funds rate finally moves into positive territory.”
Flattening and inversion of the yield curve will put bank lending and credit growth under pressure, alongside a potential full-blown US trade war, which could hamper exporters globally, Lafferty says.
Chances of a global slowdown in 2019
Investor consensus is for a recession in Q1 2020, though investors are split between 2019 (41%) and 2020 (43%), according to a Bank of America Merrill Lynch survey conducted in Q2. However, respondents, who represented $643bn (€551bn) in assets, did not list Brexit as a tail risk, instead citing a US Federal Reserve or European Central Bank policy mistake, escalation of the Trump trade war or a rising oil price.
The International Monetary Fund’s (IMF) latest World Economic Outlook forecasts that although the global economy will expand at 3.9% in both 2018 and 2019, slightly faster than the 3.7% achieved in 2017, there will be a global slowdown. The UK is among a small handful of advanced economies where growth has slowed, it says.
Neil Birrell, chief investment officer at Premier Asset Management, says: “The US economy is strong and momentum is such that for there to be a recession in the second half of 2019, it would have to fall off a cliff.”
That said, Birrell says we are near the peak of the cycle.
He says: “A slowing of growth in the US will impact on global growth and the UK, where growth is much slower and the economy is fragile. Any slowdown would be compounded by a problematic exit from the EU, meaning looser monetary policy and lower sterling, which has the obvious impact on the equity market.
“The biggest problems for the UK are this side of the Atlantic.”
Meanwhile, the fourth industrial revolution, based around artificial intelligence, automation and big data, will save the US from entering recession next year, according to Hector Kilpatrick, chief investment officer at Cornelian. That, combined with increased capital expenditure, will improve productivity, Kilpatrick says.
Catalyst for UK slowdown
Toby Gibb, client portfolio manager at Fidelity International, says the firm does not have strong conviction as to when the next UK slowdown will come, but thinks that the most likely catalyst would be rising expectations of a no-deal Brexit over the coming months.
“While the economic implications of this are still unknown, the impact on sentiment will be significant. This will negatively impact business and consumer confidence, and therefore spending decisions.”
Last week, the government released papers advising people and companies on how to prepare for a “no-deal” Brexit scenario.
Fidelity International is “quite cautious” on the outlook for the UK economy given political uncertainty and mixed macroeconomic data.
Unloved UK equities
Mike Coop, head of multi-asset portfolio management at Morningstar Investment Management Europe, says while UK profits have lagged global peers, they remain “fundamentally durable”.
Coop says: “The truth is that the Brexit uncertainties are already well recognised. While investors seem to be confused on how to price it, reflected in heightened volatility, we have reason to believe it is becoming a fear-driven response.”
He reckons US markets could suffer more in the case of a global slowdown due to valuation, financing and leverage risk. The most dangerous time to be invested is when market optimism meets disappointment, he adds. “We rarely know when the disappointment will hit, but we can (more or less) know when investors are overzealous.”
Chris Godding, chief investment officer at Tilney, adds that it is too early to comment on the nature of a downturn and how synchronised it will be.
“Our central case on Brexit is that the EU and the UK will seek a two-year extension to reaching a deal post March 2019 and the deferral will limit capital investment in the UK for an extended period.”
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