Goldman Asset Sees Brexit Deal But the Good News Ends There

(Bloomberg) -- Goldman Sachs Asset Management needs more than just the promise of a late-stage Brexit deal to turn bullish on U.K. assets.

GSAM's global fixed income team expects that Britain and the European Union will strike a “thin” trade pact toward year-end, yet maintains a “broadly neutral” position in the pound, gilts and the nation's corporate credit market regardless.

The economy faces “Covid-19 and Brexit headwinds, with markets oscillating between developments on both,” Hugh Briscoe, global fixed-income portfolio manager at the firm, said in an interview Sept. 25.

GSAM has held these views through the year, and Briscoe's comments were left unchanged after Bloomberg contacted an external public relations representative on Thursday.

On Friday, the pound swung to a gain after the U.K. announced Prime Minister Boris Johnson will hold talks on Saturday with European Commission President Ursula von der Leyen. It's been a volatile week for the currency amid conflicting signals about the outcome of a final scheduled round of Brexit negotiations that could determine whether Britain avoids a messy divorce at year-end.

“Despite fragile and often volatile negotiations, I do think the EU and U.K. will reach a deal,” Briscoe said.

Johnson to Intervene in Brexit Talks in Bid to Break Impasse

Yet four years of uncertainty over the U.K.'s future outside the bloc have already taken their toll on the economy. And the latest spike in coronavirus cases are further muffling the significance of every twist and turn in the drama for some investors.

Financial services firms operating in the U.K. have shifted about 7,500 employees and more than 1.2 trillion pounds ($1.6 trillion) of assets to the European Union ahead of Brexit -- with more likely to follow in coming weeks, according to EY, one of the world's largest accounting firms.

Allianz Global Investors also anticipates a deal -- but one so limited it would fit the Bank of England's previous models of a hard Brexit, said portfolio manager Mike Riddell. He added that gilts, U.K. inflation markets, credit and sterling are flashing different signals about the risk of not reaching an accord.

“While our core view of the likely outcome isn't that far from consensus, we are bearish gilts, short sterling and short inflation, given the anomalies in market pricing,” he said.

Flashes of Optimism

Not everyone is pessimistic about the pound. BlueBay Asset Management turned bullish on the currency against the euro last week, and sees it strengthening about 3% to 88 pence on a trade deal. The firm is more cautious the pound-dollar pair, Chief Investment Officer Mark Dowding said Friday.

“The U.S. election scenarios are multiple and complex and Trump getting Covid only adds to this,” he said. “Having a view on a U.K. deal then playing euro-sterling is a much cleaner trade.”

Despite the bleak outlook for the U.K. economy, GSAM doesn't expect the BOE will cut interest rates below zero. Economists at Goldman Sachs Group Inc. said in September that failure to reach a trade deal could be among the factors that would push rates into negative territory.

“The central bank's commentary has been somewhat nuanced, perhaps because policy makers would like to preserve optionality in event of an untidy Brexit,” GSAM's Briscoe said. “In any case, we have scaled back our underweight position in U.K. rates.”

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