BrexitStaying underweight on UK stocks

UK Prime Minister Theresa May's speech in Florence, aimed at kickstarting the Brexit negotiations, seems to have been a relative success, says UBS Chief Investment Office (CIO).

Theresa May adopted a more emollient tone in Florence (Keystone)

There was little new or particularly surprising content in May's speech, said CIO economist Dean Turner. The formal acceptance of the need for a transition deal was inevitable, as was the commitment from the PM that no EU member should be financially disadvantaged from the UK's decision to leave the European Union.

"Arguably, it was the more emollient tone adopted by the prime minister that was the most important and surprising development," said Turner. "This is a welcome turnaround from the somewhat confrontational stance adopted thus far, and will hopefully continue in the months ahead."

The bigger question is whether the current sticking points – such as payment for the UK's departure and the Northern Ireland border – can be overcome. In CIO's view, the question of money shouldn't be insurmountable, especially if there is a small concession on the part of the EU with regards to tying this in with transition talks.

And on Northern Ireland, again, differences should be easy to smooth out, but it might have to come in conjunction with some recognition on what a future trade agreement could look like.

Meanwhile, the economy is still trundling along, with growth at a sluggish 0.3 percent from the previous quarter, and continuing to lag its Eurozone peers. Sluggish as it may be, economic growth at the current rate should still be enough to motivate the Bank of England to hike interest rates at its November meeting.

"The bar is now very low for a November hike, so much so, it is hard to imagine how bad the data would have to be over the next few weeks to prevent such a move," said Turner.

For investors, a moderately looser fiscal stance and the well-telegraphed rate hike are likely to keep gilt yields close to recent highs and also support sterling around current levels. A falling pound proved a boon for the UK stock market following the EU referendum, and the reverse may now be taking place.

"Taking into account the stronger earnings momentum in Europe, the recent underperformance of UK equities relative to the Eurozone is likely to continue," said the economist.