27 June 2016
Brexit: What the fund managers are saying
Despite polls suggesting the vote could well have gone either way, Brexit still took the UK—and the world!—somewhat by surprise on Friday. On the first day of trading after the result was announced, the UK stock market finished down 3.4%¹. The pound was at £1.37 to the USD just before midnight². The day before the vote, it was at £1.48³.
We've put together some commentary on the impact of Brexit on your investments as well as a general guide on how to invest in volatile markets. Below, we've also taken a look at what some of our Elite Rated fund groups are saying.
- Franklin Templeton
- Church House Investments
- TwentyFour Asset Management
- Fidelity International
- Investec Asset Management
- AXA Investment Managers
- Invesco Perpetual
- M&G Investments
Franklin Templeton Investments; David Zahn, head of European fixed income
“I would expect what investors consider to be 'risky' assets such as equities and corporate bonds to underperform and for there to be a flight to quality to those perceived as less risky, most notably gilts and bunds.
“The key element to watch [in the coming months], in my view, will be how the political landscape in the United Kingdom pans out. I would expect there to be some changes. I think the situation is going to be very highly politically charged, and that always tends to make investors nervous. If there’s one thing financial markets dislike, it’s uncertainty.
“Investors may want to consider taking this opportunity to think about setting up their portfolios for the long term. We think there may be some opportunities in the coming weeks and months from this upheaval because some otherwise attractive assets might be caught up in the melee.”
Elite Rated funds: Franklin UK Mid Cap
Church House Investments; James Mahon, CIO and co-manager of the Church House Tenax Absolute Return Strategies
“Currency and financial markets have reacted to the resulting uncertainty in the usual way and there has been a flight to quality (the 10-year gilt yield has dipped below 1%). It is worth noting, however, that existing laws and regulations remain in place and that it will take two years or more for the UK to negotiate its exit from the EU.
“Our Church House Tenax Absolute Return Strategies Fund has maintained its low-risk profile with around 44% of the fund in floating rate notes and cash. Exposure to equities is low and the fund is also maintaining exposure to US dollar bonds.
“As always, it is the equity allocations that bear the brunt of the volatility but for clients with cash awaiting investment, the likely overshoot on the downside may well present useful opportunities to establish, or add to, equity holdings at depressed levels.”
Elite Rated funds: Church House Tenax Absolute Return Strategies
TwentyFour Asset Management; Mark Holman, CEO
“The consequences of a Brexit on the UK economy at this stage are going to be hard to predict, but we believe that overall it will harm growth and result in a policy response from the Bank of England, with a rate cut to 0.25% at the next meeting on 14 July.
“Yield will therefore remain the market’s most scarce commodity over the medium term. In the near term, risk assets may well continue to be volatile with some drawdowns, but once the turmoil is over we think this will be relatively short lived.
“For investors looking for yield in their portfolios generally, we think the Brexit vote provides an attractive entry point to capture it.”
Elite Rated funds: MI TwentyFour Dynamic Bond
Fidelity International; Tom Stevenson, personal investing
“Sentiment has taken a massive jolt. The search for a port in the storm that sent government bond yields to scarcely believable low levels may gather momentum again. The fixed income element of a portfolio is likely to swing back into focus, with government bonds in the spotlight.
“Bonds issued by the British government—gilts—face opposing forces. Reduced appetite for bonds is likely to be offset by any action the Bank of England feels obliged to take to stabilise markets. Mark Carney, the bank’s governor, made clear he stands ready to do what is required in the weeks and months ahead. Interest rates could fall further towards zero and quantitative easing will be back on the central bank’s radar.
“This is a moment to take a deep breath and focus on long-term investment goals. Uncertainty is often equated with bad news but it is not necessarily so. At moments like these it is vital to keep a sense of perspective. Avoid stopping and starting investments. Timing the market is fraught with danger because the best days in the market often come hot on the heels of the worst. Withdrawing from the fray can mean you miss out on these rallies. Doing so can seriously compromise your long-term returns.”
Woodford; Neil Woodford, head of investment
“The independent report that we commissioned earlier in the year concluded that Britain’s long-term economic future would be largely unaffected by a decision to leave the European Union. We stand by these conclusions.
“That is not to say there won’t be challenges in the near-term. There will. We now face a period of uncertainty as the exact terms of Britain’s exit from Europe are negotiated. Financial markets loathe uncertainty. [Plus] the global economic backdrop will continue to be challenging, regardless of our membership of the EU.
“However, the portfolio strategy will not change. It was designed for a challenging world, characterised by low growth, deflation, debt problems, weak productivity and troubling demographics.
“Although market conditions such as these can be unsettling, we would strongly urge investors to look through this period of uncertainty and focus on the long-term opportunity which, in our view, continues to remain attractive.”
Elite Rated funds: Woodford Equity Income
Investec Asset Management; Simon Brazier, manager Investec UK Alpha
“This result does impact all equities as growth prospects in the UK and globally are revised downwards. The UK Alpha strategy is focused on high quality companies that generate cash and have opportunities to reinvest that cash. In terms of sector positioning, the largest underweight is banks and we have been reducing domestic cyclicals over the last year. We invest on a three to five year time horizon and we will not be making significant changes to the portfolio.
“A large focus of the portfolio is on globally diversified companies such as Unilever, BAT and Reckitt Benckiser who should continue to deliver growth. In addition, we have been increasing exposure to overseas earnings such as Visa, ADP, Checkpoint and Verisign, which have limited European revenue and GDP exposure. We will need to factor in the lower GDP growth numbers into our company forecasts. However, we will see significant volatility in the days ahead and with that will be opportunities for us to add to positions that become oversold.
AXA Investment Managers; Chris Iggo, CIO fixed income
“As expected, the decision triggered a huge risk-off move in financial markets with the pound sinking to its lowest level against the dollar since 1985. Bond yields are lower because of the flight to safety. In the credit markets, spreads are wider because of the political and economic uncertainty that flows from the vote. There will be buying opportunities.
“Central banks will provide liquidity, rate hikes are off the cards, and bonds have better capital preservation characteristics than equities that face an uncertain earnings outlook.
“Although “Leave” was not our central expectation, the views on fixed income don’t change that much. Investors still need yield, it will take time for the economic implications of Brexit to become clear, and there is a lot of cash to be invested. Higher yields in credit and emerging markets won’t last for long.
Invesco Perpetual; Nick Mustoe, chief investment officer and Mark Barnett, head of UK equities
Nick: “Over the short term, the decision to forego EU membership will likely lead to weakening of sterling and impact UK economic growth.
“The immediate impact on the UK economy and growth will likely be determined by several domestic and global factors, from trade, productivity and capital investments (domestic and direct foreign) to the direction of central bank monetary policy.
“Longer term, we believe the UK economy will not only be able to handle the decision to leave the EU, but continue to thrive as we remain optimistic about the UK's growth outlook. Having experienced some of the strongest growth among the G7 nations over the past four years, we believe the economy is well positioned to handle what lies ahead.”
Mark: “We believe the best businesses will be well equipped to deal with the challenges wrought by Brexit. UK companies have withstood the numerous and variant headwinds of the recent period – where discussion around US interest-rate policy, the direction of the US dollar and commodity prices have contributed to hostile market conditions.
M&G Investments; Jim Leaviss, head of retail fixed interest
“The Euro is performing badly as both the economic and political implications of the “Out” vote are digested – will European growth be hit, will other EU nations hold their own referendums, what will become of the periphery and the banking sector?
“The 'losers' in bond markets are the riskier fixed income assets. Fundamentally, the sell-off in risk assets presents some opportunities for long-term investors. However with liquidity likely to be potentially low for some days to come, the chance to pick up bargains might be limited.
“We [now] expect the US Federal Reserve to be on hold. No rate hikes for the foreseeable future.”
Rathbones; James Thomson, manager, Rathbone Global Opportunities
“We believe that uncertainty will pervade financial markets and weigh on economic growth for at least two years. Uncertainty alone is enough to delay spending, hiring and investing. Investors should be mindful of sectors most correlated with GDP growth, such as certain cohorts within banking, insurance and consumer goods.
“Although we believe that GDP growth will suffer in the first few years, we do not believe that trade and investment will collapse. Although we know from survey data that access to the single market is an important factor contributing to the UK’s attractiveness as an investment destination, it is far from the only reason. The UK ranks as one of the easiest places to do business in Europe (taking into account red tape, tax regimes, etc.), while it also excels as a centre of agglomeration – an economics term to sum up the benefits gained when companies locate near each other.”
BlackRock; strategists and portfolio teams
“We expect European leaders to focus on fending off domestic populist movements emboldened by the British exit and on preventing the entire EU edifice from falling apart. This points to a tough negotiating stance toward the UK and less focus on much-needed structural reforms.
“We see a weaker euro over time and pressure on European shares, credit and peripheral bonds such as Italian government debt. We expect limited pressure on government budgets, however, as high-quality government bonds are in demand in a low-rate world.
“The Bank of England’s first priority will be to provide ample liquidity to avoid any funding stresses, in our view. The magnitude and volatility of the British pound’s fall will likely dictate further responses. We expect the central bank to cut its 0.5% policy interest rate to zero soon. We expect credit rating agencies to quickly adopt negative outlooks for UK government bonds, with downgrades to follow.
“We see the vote leading to declines in global shares and other risk assets. Yet indiscriminate selling could translate into opportunities. US and Asia markets are only marginally affected by the UK’s exit from the EU, and are supported by a mix of easy monetary policy and economic growth. In the UK, we expect the large-cap FTSE 100 Index to outperform the more domestically focused FTSE 250 Index. A UK currency drop benefits large companies with overseas earnings, whereas domestic sectors such as home builders, retail and financials look vulnerable.
“Commercial property values could fall around 10% over the next year, led by declines in oversupplied central London, we believe. We expect sharply reduced tenant demand and a shift toward shorter lease terms. Overseas investors are set to demand a larger risk premium, or more compensation, for holding UK assets. We see little risk of debt-forced sell-offs, however, as developer financing is mostly long term.”
Schroders; Peter Harrison, group chief executive
“Today’s events had very few parallels to those of the 2008/09 global financial crisis. This was particularly the case with regards to the corporate sector, where balance sheets are now in much better shape than eight years ago when the global banking system teetered on the brink of collapse.
"The huge amount of leverage in the system was the key precursor to the events of 2008/09. This is about the UK leaving a trade bloc, it’s not about global leverage and a collapse in world trade, I think the two are very different events.
“We are selectively going through some of the numbers and if we think ‘there’s something we can pick up a bit cheaper’, then we are buying things that have been mispriced, and I think what we are seeing is a bit of bargain hunting going on.”
Where to next?
¹Google Finance, FTSE All Share, 24/06/2016
²Google Finance, GBP to USD, 24/06/2016, 2300hrs
³Google Finance, GBP to USD, 23/06/2016, 2300hrs
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The managers' views are their own and do not constitute financial advice.