There could be 10 to 15 per cent more downside in sterling should the UK leave the European Union without a deal, Schroders’ Sue Noffke has said.
Speaking to FTAdviser Talking Point, Ms Noffke, who manages the Schroder Income Growth trust, explained that without a withdrawal agreement in place by next March, "we would likely see sterling weaken further".
"We think there could be as much as 10 to 15 per cent further downside in sterling," she added.
Ms Noffke said: "If we get a withdrawal agreement, we are likely to see some strengthening in the value of sterling and that might cap any rise in the UK stockmarket per se, to a more modest level than investors might initially think about.
"But you would see a particular rise in those domestic companies that have been very much out of favour – so that’s the domestic banks, the likes of BT, ITV and Tesco, the property companies and the housebuilders.
"That area of the market could see quite a rapid bounce to recover some of the losses they’ve sustained in recent months."
On November 15, Prime Minister Theresa May’s draft withdrawal agreement received approval from the cabinet but it prompted several resignations, including Brexit secretary Dominic Raab who has since been replaced by Stephen Barclay.
Included in the deal was the basis for a transition period and the amount of money the UK is expected to pay the EU.
But the withdrawal agreement still has to be backed by the 27 other EU member states.
If the UK leaves the EU without an agreement and sterling is weakened, Ms Noffke said this would negatively impact the domestically-focused stocks but would be a "boost" for international earners.
"The FTSE 100 would be expected to outperform and some of those valuations really would rise by quite some way because 40 per cent of the dividend income for the UK is declared in dollars and euros," she explained.
"That would be quite a substantial boost to what is already a high yield on the UK equity market. Quite a strong performance in local currency terms from the UK equity market, for international investors they would have to be hedged in sterling terms to be able to benefit from that rise."
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eleanor.duncan@ft.com
