Woodford IM: 'No-deal' Brexit 'nowhere Near As Bleak As Many Have Predicted' For UK Economy

The firm commissioned Capital Economics to carry out further research on Brexit and its impact on various parts of the UK economy, after doing so in the lead up to EU referendum in February 2016.

The group, led by veteran fund manager Neil Woodford, has now published Brexit: where are we now? which found that although there would be some "economic dislocation" with growth dipping under 1%, the government would react with a combination of low interest rates, low taxes and increased subsidies to counteract the market shock.

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Commenting on the report's findings, Woodford IM's head of investment communications Mitchell Fraser-Jones said "in the event of no deal, the long-term prospects for the UK economy are nowhere near as bleak as many have predicted".

Fraser-Jones referenced a recent Twitter poll carried out by the firm in which "almost half of the 42,000 that voted believe the UK economy is ‘facing a cliff-edge' as a result of Brexit".

He said: "This negative consensual view is reflected in the UK stockmarket, helping to forge a compelling investment opportunity in domestically-focused stocks.

"There is considerable grounds for optimism that the long-term outcomes for the UK economy will be far better than the alarmed consensus would suggest."

However, the report does not predict a no-deal scenario and instead said that a ‘compromise deal', whereby the UK retains some features of EU membership.

Fraser-Jones said he expected a deal to be struck with the EU "in the coming months", as "neither side can be entirely comfortable about the prospect of walking away from the table without an agreement".

He added that Bank of England Financial Policy Committee notes, released last month, came to a similar conclusion.

"These highlighted that £20trn of uncleared derivatives contracts, impacting tens of thousands of counterparties, were potentially at risk of disrupting the functioning of financial markets in the event of no deal," he added.

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The report said a compromise deal, which is expects to be reached by November 2018, is "not likely to have a meaningful impact on the large proportion of the economy that does not participate in international trade".

It added: "Indeed, there are good reasons to think the British economy will continue to perform well whether or not it is inside or outside of the EU." 

"The City of London will likely remain a hub of prosperity after March 2019. London's pre-eminent position as a global financial centre predates the single-market, and the City possesses intrinsic advantages, which will endure."

In the Capital Economics report it added: "Due to financial services' outsized importance for the UK, Brexit could help the industry in two key respects.

"One is that industry may avoid future deleterious regulation from Brussels (such as the potential Financial Transactions Tax), thus helping to retain London as a destination of choice.

"The second is that, in pursuing its own free trade agreements, Britain may be able to prioritise coverage of financial services in a way which the EU, as a collective entity couldn't or wouldn't be able to do."