Sovereign Funds May Sell off U.K. Assets on Brexit Deal

(Bloomberg) -- Sovereign wealth funds and central banks may look to cut their U.K. assets in 2017 after sentiment toward the country slumped in the aftermath of Britain's vote to leave the European Union, an Invesco Ltd. report showed.

About 41 percent of institutions, who together oversee about $12 trillion in assets, said they expect to introduce new underweight positions in the U.K. this year, according to a survey published Monday. Britain was deemed to be the least attractive developed market to invest in, falling behind Italy and France. The country scored 5.5 out of 10, down from 7.5 in 2016.

“It's a very sharp movement for what was one of the most attractively rated markets,” Alex Millar, Invesco's head of sovereigns in Europe, the Middle East and Africa, said by phone. “When you wake up one morning and your investment is worth 20 percent less than the previous day, that's going to have an impact,” he said, referring to the pound's depreciation on Brexit.

The survey, which interviewed 97 institutions from January through March, found that investors were starting to question the future of Britain as an “investment hub” in Europe. This comes after Prime Minister Theresa May pledged that she would seek a good deal for London's financial-services industry when she negotiates the country's withdrawal from the EU. She first has to win this week's general election.

The sovereign investors, which also includes state pension funds and government ministries, instead rated Germany as the most attractive European market to invest in with 7.8, the survey showed. That was followed by Italy and France which both scored 6.1 out of 10. Globally, the U.S. had the highest rating with a score of 8 while India was the most preferred in the emerging markets.

Uncertainty around what sort of trading deal the U.K. will manage to hash out with Brussels is forcing many investors to take a “wait-and-see” approach, according to Invesco's Millar. Some 54 percent said they aren't making any changes to their allocations until they can assess the longer-term impact of Brexit, the survey shows.

Among the asset classes, sovereign investors are planning to further increase their allocation to real estate in 2017 globally, largely because of a good supply of investment opportunities. The survey found that difficulty getting access to infrastructure and private equity deals held back investment returns for sovereign investors.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net.

To contact the editors responsible for this story: Neil Callanan at ncallanan@bloomberg.net, Jon Menon, Paul Armstrong