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22nd March 2016

Elite Rated Jupiter Strategic Bond manager Ariel Bezalel on the impact of a potential 'Brexit'


Brexit could spark significant global volatility

“A UK exit from the European Union would in all likelihood damage the UK’s world standing, throw into question the European project and have the potential to generate a global shock that would spark significant volatility across risk assets,” says Ariel Bezalel, manager of the Elite Rated Jupiter Strategic Bond fund.

“Since the beginning of the year, concerns have grown about the possibility of the UK opting to leave the European Union (EU). I believe a vote to leave would result intially in a weaker pound and weaker UK assets, since markets really dislike uncertainty. However, I am not convinced that the long-term economic impact would be particularly negative. In fact, the impact of a weaker pound could, if anything, provide a boost to UK exports and I don’t believe that many countries in Europe would simply stop trading with the UK if it opts to leave.

“My concerns about Brexit centre more around the political scene, where the EU’s standing would be greatly diminished without the UK. In turn, the UK’s standing globally would likely be greatly diminished. It is highly probable that Prime Minister David Cameron would be forced to step down. We also believe that the UK leaving would create an existential question surrounding the future of the European project. In countries such as France, Poland and Spain, former fringe parties are making big headway in the European political scene. A UK exit would, in all likelihood, increase the popularity of anti-establishment movements active across the continent. This, in our opinion, could create volatility across risk assets. This is one reason why, at the recent G20 meeting, finance ministers warned that Brexit could generate a global shock.

“For much of February, UK assets were under pressure as investors sentiment toward the UK turned negative on fears of a ‘Brexit’. Since then, we have seen something of a rally, as risk has been back in vogue as investors have realised that UK corporates are generally in good shape. It’s worth remembering that a benign interest rate picture, combined with economic strength, should enable many of the companies we own to pay down debt that bit quicker.”

UK remains a core allocation for the fund

“With all this in mind, we have positioned the fund in an attempt to mitigate these risks. The UK remains a core allocation within our global portfolio. The fund’s exposure to the UK currently stands at around 28%, with banks making up around half our exposure".

“There are several reasons why we like the UK. Firstly, we believe that monetary policy is likely to remain loose for some time to come. In fact, the market currently expects no rate rise in the UK until late next year. Secondly, the UK economy is in relatively robust shape and has outperformed many of its peers globally. Finally, we prefer UK banks to those in the eurozone because we believe they are, broadly speaking, the healthiest banks in Europe. This is crucial, since the days when bondholders could expect to be bailed out in the event of a bank failure appear to be over. The UK financials we like include Lloyds, RBS, Nationwide, Coventry and Barclays.”

A sovereign call

“There are many problems that the world has to contend with. In November, a crucial US presidential election will take place, the outcome of which is far from certain. Whoever wins, it feels as though there will be significant changes in US policy. In addition, China’s economy continues to weaken. As a key importer of goods and services from many countries, China’s slowdown has important global ramifications. All these factors suggest to us that now is a time to tread carefully.

“Today, the fund holds almost a third of its assets in high-quality sovereigns such as the US and Australia, which tend to perform well on days when risk assets are weak. This assisted the fund’s performance in January and February. In addition, we currently hold about 2% of the fund in gold mining convertibles, which have performed well of late, as gold is now being perceived as a safe haven asset.”



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. Ariel's views are his own and do not constitute financial advice.