COMMENT Hermes Investment Management is not the only fund manager to have run a Brexit mitigation project since the referendum. But it went further than most this week when it announced senior appointments to a new management company, domiciled outside the UK, directly “in response to the risks posed by Brexit”.
Yes, Hermes Fund Managers Ireland Limited, suits the £36bn manager’s broader strategic outlook and commercial expansion plans in Europe. But the business is unambiguous when it says the decision was in large part driven by the risk of a “hard Brexit”. It’s a risk that is ramping up by the day.
From Jaguar Land Rover and Ford cutting thousands of jobs – including at least 2,000 in the UK – to Hitachi’s decision to halt its investment in the Wylfa nuclear power station in Wales, these are fragile times for UK plc.
Chancellor Philip Hammond sought to calm fears on a call with business leaders this week. It was Balfour Beatty chief executive Leo Quinn who is said to have reminded him of the consequences of the current crisis: “The enemy of business is delay and procrastination, and the construction industry will face large-scale restructuring where it cannot carry the resources it will need over the next 25 years, and capability will have to be let go.
“Once resources are lost to industry it is very difficult to get them to come back. The next six months are critical.”
Assuming Hammond and his fellow politicians make a better job of the next six months than they have of the last, are we safe to assume that investment will rebound?
Don’t count on it, says Capital Economics.
Caution was already apparent in December’s Thomson Reuters Asset Allocation Poll, which reported that firms were looking to put just 1.6% of their global balanced multi-asset portfolios in UK property, compared to a 2018 average of more than 3%.
Now, after a tumultuous week, Capital Economics sees investor caution continuing throughout the first half of 2019, although an Article 50 extension – and an approach best described as “fudge and delay” – may help full-year GDP growth to 1.5%. Yes, say the economists, this will help investment activity, “but we think that the stronger growth outlook will also entice the Monetary Policy Committee to raise interest rates twice this year. With valuations in many property sectors looking stretched, this is expected to put upward pressure on property yields.”
But didn’t investment activity pick up after the referendum, proving the doomsayers wrong? Capital Economics points to a stronger economic environment in 2016, one where property values appeared less stretched. Throw in a bank rate which sat two and a half years ago at historical lows, putting less upward pressure on property yields, and sterling’s depreciation, which undoubtedly increased the attractiveness of UK property to overseas investors, and now looks very different to then.
Of course, a supportive Brexit deal remains a possibility, something that would fuel investment activity in the second half of the year. However, it seems economic fundamentals may not.
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