The valuation of shares on the UK stock market already reflect the potential downsides from a no-deal Brexit, according to Alistair Mundy.
The manager of the £1bn Temple Bar trust said investors should simply replace the word Brexit with the word recession because the fear many have about the consequences of the UK leaving the European Union is that a recession would happen.
Mr Mundy said: "The conventional wisdom is that those stocks stuffed with overseas earnings and/or defensives are best placed for a hard Brexit. So, my question back (and equally hard to answer) is 'how much of a hard Brexit is already discounted in share prices'.
"My answer would be 'quite a lot' – surveys tell us that UK equities are out of favour and, within that, those stocks most exposed to the cyclical parts of the UK economy are particularly out of favour.
"It seems that the market is certain a hard Brexit would be bad for sterling, but there must be a chance that the worst of the depreciation has already happened. And perhaps a hard Brexit won’t be as bad as people think.
"Another way of looking at all this is to try and relieve ourselves from the emotions of Brexit and substitute 'a recession' for 'Brexit'. We are trying to find those stocks which look cheap on a through-the cycle basis ie not for next year but for an average year. And a cycle typically includes a recession. And the good news is on through-the-cycle numbers several stocks are getting cheaper."
Investors have withdrawn an average of £379m a month from funds in the IA UK equity sectors over the past year.
The most recent GDP data for the UK showed growth of 0.4 per cent.
In his most recent evidence to the Treasury select committee, Bank of England governor Mark Carney divided the no-deal Brexit options in two. He said there could be an "orderly" no-deal, where the UK leaves the EU and trades on World Trade Organisation terms after a transition period.
The alternative, he said, was a Brexit where the UK exits the EU in March and immediately reverted to WTO terms, which he described as a "disorderly" Brexit.
The Bank of England’s forecasts for a steep decline in GDP were based on the disorderly outcome discussed by Mr Carney.
Fraser Mackersie, who runs the £72m Unicorn UK growth fund, said there were many companies, particularly in the technology area, that could grow whatever happens to the UK economy, and he is trying to focus on those.
Adrian Frost, who jointly runs the £6.3bn Artemis Income fund, said: "Returns over shorter periods tend to be driven by what tweet is sent on what day and whether the dialogue over trade wars is on speaker or mute.
"Understandably, this environment favoured defensive sectors and, to be fair, companies that reported results during the month reminded us of these qualities. By contrast, cyclical stocks struggled to impress and, in general, there is increased mention of inflating costs."
Jason Hollands, managing director of business development and communications at wealth manager Tilney said UK equities were beginning to look like an investment opportunity to the valuations.
david.thorpe@ft.com
