MM Warburg bank avoids UK assets

MM Warburg, one of the few banks to predict Britons would vote to leave the EU, is avoiding UK assets.

Since the June referendum, the 218-year-old Hamburg-based lender has limited its direct investments in UK equities and bonds and will continue to do so, according to Carsten Klude, its head of asset management and chief economist.

Even as he acknowledges having “burned” his fingers — the UK’s stocks and government debt are top performers in Europe this year — Mr Klude says a so-called hard Brexit is looking increasingly likely and will send the assets tumbling.

“Trade negotiations are very, very complicated,” he said in an interview. His firm manages €51bn of assets.

“I wouldn’t be surprised if Brexit negotiators come to realise after two years that they haven’t executed the whole programme,” he said.

The benchmark FTSE 100 Index surged as much as 18% from the low in the aftermath of the referendum, boosted by a slumping sterling and economic data that have been beating forecasts, while gilt yields fell to a record in August.

While the IMF upgraded its outlook for the UK, Mr Klude predicts prime minister Theresa May will run into tough negotiators when she engages with her EU counterparts in the new year, and that will negatively impact the economy and markets.

The pound sank to its lowest since 1985 this week, after people in her administration said financial-services companies will get no special favours in secession talks, increasing concern that the country is heading for an exit that would restrict access to the EU’s single market.

“The major sticking point” will be the services and financial sector as the UK’s goal to clamp down on immigration collides with EU rules, Mr Klude said.

“The EU will be very, very rigid on this issue, which will probably have the biggest economic impact.”

Mr Klude was one of few economists predicting a majority of UK voters would back a secession as he assumed emotions would override pragmatism.

He said in April that a “thin majority” of voters would choose to leave the EU, accurately forecasting the 52% that did on June 23.

By contrast, economists at Societe Generale SA put the probability of Brexit at 45%, Morgan Stanley at 35% and Citigroup between 30% and 40%.

The only London-listed stock MM Warburg invests in is Wolseley, a distributor of building and plumbing supplies, because most of its revenue is generated in the US so it “can benefit from pound depreciation,” Mr Klude said.

It gets about 70% of its sales from North America and just 15% from the UK and Ireland.