Worst case Brexit priced into pound, says Rathbones' Smith


Even the "worst case" Brexit scenario is already priced into the currency market, according to the head of asset allocation at Rathbones.

"I think we can perhaps see it most clearly, if there is an argument for it being priced in, in currency markets," Ed Smith said. 

"The pound is very undervalued against the euro and the dollar and some other major currencies on a variety of different metrics."

Mr Smith explained how he used the Behavioural Equilibrium Exchange Rate, which looks at how currencies move in relation to productivity between different countries, how savings differ and how prices differ, to measure this.

"If we hypothesise scenarios for a really bad case Brexit on how that would impact productivity, prices and savings, we still can’t get that equilibrium exchange rate below today’s actual exchange rate.

"That looks like we’re actually priced for more than the worst-case scenario," he said.

He acknowledged while a no deal or hard Brexit was priced into sterling, it was "trickier" to ascertain whether this was priced into other asset classes.

Asked what was meant by a hard Brexit, Mr Smith explained: "A hard Brexit means withdrawing from the Single Market programme, withdrawing from the Customs Union, putting up barriers that make it harder for us to sell our financial services into Europe.

"That may have some really positive, very long-term consequences if it gives us more freedom to do better deals elsewhere."

But he warned in the short to medium term it was "going to be tough" because the UK was making it harder for British businesses to sell their product, meaning productivity would take a hit which would be bad for growth.

Turning to how advisers could reassure clients about the political and economic uncertainty around the UK’s departure from the EU, Mr Smith emphasised most client portfolios were invested globally.

"We have to remember what we should really be concentrating on is what’s going on in the global business cycle," he added.

He said the global business cycle was still in the expansion phase and for clients to remain invested.

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