Market commentators have cautioned the outlook for the UK economy could decline if Prime Minister Theresa May fails to secure a trade deal with the European Union (EU) while the consumer could also come under further pressure, as the country embarks on two years of divorce negotiations with the bloc.
On 29 March, May wrote an official letter triggering Article 50, which EU officials will respond to over the next month with negotiating guidelines.
Until now, the UK economy has weathered the storm of Brexit uncertainty better than expected, with GDP growing at 2% in 2016, but the significant falls in sterling that followed the vote have translated into higher inflation, which reached 2.3% in February.
If the pound falls further and inflation keeps rising, consumer spending growth could come under pressure, with recent analysis by PwC predicting annual growth could slow from 3% last year to around 2% this year and 1.7% in 2018.
Keith Wade, chief economist and strategist at Schroders, said: "We have seen the beginnings of a slowdown in the domestic economy coming through the consumer, plus domestic investment has been weak in the UK.
"Our outlook is for relatively sluggish growth and bouts of weakness in the pound as a result, so we are more concerned about the smaller-cap areas of the UK market."
Paul O'Connor, head of multi-asset at Henderson, is also particularly concerned about the short amount of time allotted to the negotiations, which are expected to conclude around autumn 2018, pointing out the recently conducted trade deal between Canada and the EU took seven years to complete.
O'Connor said: "The risk of an UK exit without a trade agreement is high. A no-deal, 'hard Brexit' outcome, with the UK falling back on World Trade Organisation arrangements, would have a significantly adverse impact on the UK economy, by introducing tariff and non-tariff barriers to trade, disrupting supply chains and undermining the UK's attractiveness as a location for foreign direct investment."
However, he pointed to a survey conducted by Bank of America Merrill Lynch in February, which shows 81% of managers polled expect a transitional deal between the UK and the EU to be reached at some point during the next two years.
Bank of England's dilemma
Meanwhile, although the Bank of England (BoE) has said it is willing to look through short-term inflation figures, Wade said it could face a difficult decision if prices continue rising, forecasting up to 3.5% inflation by mid-2017.
The economist said: "We have already seen inflation, but if we were to see repeated falls in the pound and that was to feed through to wages and expectations, the Bank would have to tighten, and that would create problems for bond markets and undermine valuations for a large part of the market.
"It would create quite a difficult environment for the UK market, particularly bond markets."
Meanwhile, Old Mutual Global Investors (OMGI) chief executive Richard Buxton has called for a rate hike, saying the Bank needs to follow the example of the US Federal Reserve, which raised rates last month for the third time since December 2015 to 0.75%-1%.
Speaking at the OMGI Global Markets Forum, Buxton said: "I feel the UK should follow suit, as the UK is growing but Governor Mark Carney is still waiting for that Brexit headwind to happen.
"He needs to put some powder back or there will be nothing for us to fall back on."
Sterling has been battered since the referendum on 23 June to trade around 15% lower against the US dollar at $1.2436, but some managers expect the currency to suffer further falls and are adapting portfolio allocations accordingly.
Jack Turner, research analyst at Seven IM, said: "The extent of the UK's current account deficit, additional complexity around Scotland's independence appeals, and a realisation that we do not have a strong negotiating position, may mean the sterling/US dollar exchange rate could even be as low as £1:$1.10.
"Ahead of this, the team has cut the allocation to sterling by a significant margin - nearly 8% in the Balanced strategies."
However, Guy Foster, head of research at Brewin Dolphin, has a more positive outlook, urging investors not to "jump ship" despite potential volatility ahead.
"The degree of negativity surrounding the UK pound has been excessive," he said.
"Better economic performance, or a more constructive resolution of the negotiations, would enable it to recover. This would be good for UK equities relative to their overseas peers, for retailers and for real estate.
"It would enable smaller businesses, which tend to be domestically-focused, to outperform larger companies, which have benefitted from the fall in the pound inflating their overseas sales."
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