PIMCO sees slowing UK economy but worst over for sterling

LONDON (Reuters) - After a court ruled on Tuesday that the legal process for Brexit cannot be triggered without parliament's approval, sterling portfolio manager Mike Amey of Pacific Investment Management Co (PIMCO) said the British economy was likely to slow in 2017.

According to the supreme court ruling, Prime Minister Theresa May must give parliament a vote before she can formally start Britain's exit from the European Union, giving lawmakers who oppose her plans a shot at amending them.

Speaking in the Reuters Global Markets Forum, Amey also said that the pound could see further weakness and that he had become more cautious on fixed-income assets.

Here are excerpts from the conversation:

Question: Let's start by quickly getting your view on this morning's ruling from the Supreme Court. Has anything changed?

Answer: No - I think the ruling was in line with expectations, although I think the market was more sensitive to the risk of the devolved assemblies needing a vote rather than the government overturning the initial ruling."

Q: What is your outlook for the UK economy going forward?

A: Our outlook for the UK economy is that we will see a slowdown over 2017. The good news is that the economy has entered 2017 with good momentum. Our base case is that consumer spending slows, but that GDP still holds in around 1-1.5 percent over 2017.

Q: Has sterling seen the worst already, namely against the euro?

A: Our view is that the pound could still see some further weakness, probably more against the U.S. dollar than the euro but that this is as much about the dollar as the pound.

Q: What changes, if any, have you made to your broad investment strategy since the vote in June?

A: We saw the big rally in UK yields immediately after the Brexit vote, which we were fortunate enough to be on the right side of. However, over the last month or two we have become more cautious on UK interest rates, in part because the economy has held up much better than expected and in part to take a more defensive stance after the rally.

Q: What timeframe are you going for in terms of final Brexit - is two years achievable?

A: We think the government's strategy is to enter the negotiations on the assumption that the UK leaves the single market and the customs union. Then if there is no room for negotiation the two-year window would become the period whereby businesses would plan for the post-Brexit world. If there is a willingness for a negotiated exit, then the two-year window would likely extend, but our working assumption at this point is that the UK leaves by the end of Q1 2019.

Q: Has the multi-year bull market for bonds peaked already?

A: We think that yields will not rise sharply, in large part because we think the challenges of high levels of gross debt, aging populations and tighter restrictions on banks will continue to act as drags on global growth. That will limit the scope for interest-rate rises. That does not mean that you cannot get a cyclical rise in policy rates -- as we will likely see in the U.S. -- but for a secular rise in yields materially greater than what is priced into the market, we are more sceptical.

(This interview was conducted in the Reuters Global Markets Forum, a chat room hosted on the Eikon platform. For more information on the forum or to join the conversation, follow this link: https://forms.thomsonreuters.com/communities/)

(Editing by Raissa Kasolowsky)

By Kirsten Donovan