The last week has been, to put it gently, an eventful one in British politics, and developments around Brexit are now so uncertain that Bernstein, one of the best-respected research houses on Wall Street, thinks the UK is — right now at least — “uninvestable.”
Writing in a note to clients on Friday, the Bernstein team led to by Inigo Fraser-Jenkins admitted that UK political developments are now so unpredictable that it is virtually impossible to model them into an investment strategy.
“With UK politics in the midst of Brexit turmoil what are investors meant to do?” Fraser-Jenkins and his team asked.
“We think that the UK market might be ‘uninvestable’ in the specific sense that the near term movement is likely to be dominated by political forces that, bluntly, are very hard to model.”
“Sometimes this moment of extreme uncertainty proves to be a cathartic moment for risk assets marking a floor. Maybe. But there are also good reasons to see why uncertainty could persist,” the team continued.
“Why take the risk of buying such a market?”
To be clear, Bernstein’s team are not saying that the UK’s fundamentals are so bad it does not recommend investing, but is simply pointing out that the lack of political clarity makes it very difficult to determine asset price movements.
In the longer term, however, things are still pretty foggy, so the firm recommends being underweight on UK stocks.
“On a longer horizon uncertainty seems likely to hang over the UK for some time to come which, we assume, will act to dampen investment. Over that longer horizon we would underweight the UK versus other regions,” the team wrote.
Bernstein’s call comes after four utterly chaotic days in European politics. On Tuesday evening rumours began to swirl that the UK had secured an initial Brexit deal with the European Union, sending the pound skyrocketing.
Just over 24 hours later, Prime Minister Theresa May appeared outside Number 10 Downing Street, confirming that a deal had been struck, and that it had the backing of her Cabinet.
By Thursday morning, however, three Cabinet members, including Brexit Secretary Dominic Raab, had resigned saying they could not back May’s deal, and the hardline European Research Group was laying the foundations for a coup against May. There is not likely to be a majority in the House of Commons that would favour the deal.
Within a day of May announcing her deal it looked to be dead in the water, and investors were not best pleased. The pound suffered its worst day in over a year, while UK banking stocks crashed, with some touching levels not seen since the day after the initial Brexit vote.
Markets calmed down on Friday, but huge uncertainty remained. For as long as that persists, expect investors to be incredibly wary of the UK.