Investors could be left surprised by the potential upside to the UK market if it leaves the EU with a deal in place, according to Merian Global Investors’ Richard Buxton, who is optimistic despite the lack of progress just weeks before the deadline. 
Buxton (pictured), head of UK equities at Merian, said that the UK economy has started to suffer from Brexit anxiety over the past six months.
Recent PMI (Purchasing Managers Index) data has shown weaker figures in both the services and manufacturing indices.
The IHS Markit/CIPS UK Manufacturing PMI index fell to a four-month low in February of 52.0, the second-lowest level since July 2016, a month after the referendum.
Its authors noted that although manufacturing output improved slightly, this was mainly due to efforts to reduce backlogs and build stocks of finished products ahead of the 29 March deadline. Growth in new orders is at near stagnation levels amid low domestic demand and a fall in export orders.
“All the way through post-referendum until the last six months, the UK has actually been continuing to grow at about 0.5 per cent per quarter, sometimes a bit more, sometimes a bit less,” said Buxton, manager of the Merian UK Alpha fund.
“Clearly the impact now is encroaching on business investment and confidence and consumer confidence. We are now at 0.2 to 0.3 per cent GDP growth per quarter.”
Quarterly performance of GDP over 5yrs
Source: Office for National Statistics
Buxton likened Brexit to a ‘handbrake’ on the economy, which, once released, would allow it to return to growth of around 0.5 per cent.
Despite the uncertainty and weaker growth more recently, the UK economy remains in a stable condition, said the manager.
“We’ve a very strong labour market in the UK, we’ve never employed as many as we do today and yet the number of job vacancies continues to rise and most of those are in the private sector,” he said. “Private sector wage growth is running at 3 per cent and, with inflation falling, real income is expanding.”
Another reason Buxton is bullish is the government’s willingness to draw a line under the post-financial crisis period of austerity, which we said will give chancellor Philip Hammond the ‘firepower’ he needs to stimulate the economy.
“Don’t expect anything to come out in [this week’s] spring statement,” said Buxton, although he expects money to be invested in the NHS and infrastructure.
Another positive for the UK economy is what Buxton describes as its strong entrepreneurial tradition, with new business formation running at double-digit levels per annum for the past six years.
“It’s very important because most people in the UK work for a small business or are self-employed, they do not work for very large companies,” he said.
One of the key reasons that the Merian UK equities head has become more bullish is that the threat of ‘no deal’ has faded in recent months,
Performance of sterling vs US dollar since EU referendum
Source: FE Analytics
“Obviously Brexit is going to the wire, we read that in the newspapers on an almost daily basis, but what I can say is that the risk of a no-deal Brexit is ending,” he said. “The currency markets are judge and jury here and sterling has turned over the course of the past few months as that possibility has diminished.”
Noting the ‘meaningful vote’ on prime minister Theresa May’s Brexit deal scheduled this Tuesday, Buxton said that MPs could wrest control of the process and rule out a ‘no deal’ – a position supported by many parliamentarians – to suspend the Article 50 process or to demand more time to negotiate.
While such a move would add another two or three months of uncertainty, the economy would likely bounce back.
“We think the UK will do well outside of the EU,” he said. “I don’t think it will be disastrous providing we have some form of deal and arrangement in transition period. I don’t think we will do as well as if we stayed within, but I think the strong entrepreneurial dynamic will be important.”
However, Buxton said that the UK market is home to big multinational names with little exposure to the domestic market and while leaving the EU with a deal could see sterling recover some of the losses it has made, it would be unlikely to hurt the performance of those stocks in the long-term.
“If sterling rallies of course there will be some immediate currency downgrades to the multinationals that dominate the stock market, but I think that will be dwarfed by a sigh of relief over the fact that we’ve got a deal and investors are coming back to the UK,” he explained.
In any case, the fund manager said sterling was unlikely to return to levels seen before the referendum.
Last year, the Merian UK Alpha fund made a loss of 11.18 per cent against a 9.47 per cent fall for the FTSE All Share index, with Buxton noting that the UK was not immune to the issues facing markets globally, particularly the end of quantitative easing (QE) and normalisation of rates by the Federal Reserve.
“It goes without saying that given the printing of money that has seen markets go up nine years in a row, it is no coincidence that when QE ends and starts going into reverse is when equity markets start to fall,” he said.
However, he also pointed out that having led the management buy-out of Merian last year, the firm had recently appointed a new chief executive – Mark Gregory – allowing him to focus on investment.
Performance of fund vs benchmark & sector under manager
Source: FE Analytics
Buxton has managed the fund since December 2009 during which time it has made a return of 121.27 per cent compared with a 108.80 per cent gain for its average IA UK All Companies peer and a 101.27 per cent return for the FTSE All Share benchmark. Merian UK Alpha has an ongoing charges figure (OCF) of 0.85 per cent.