The UK’s future membership of the European Union, and most likely its access to the EU Single Market, is set to be one of the most contentious issues debated ahead of the nation heading to the polls on 7 May.
Woodford, who heads up the £4.2bn CF Woodford Equity Income fund says uncertainty already exists within the UK but it is snowballing ahead of the national vote in which the Conservative party have pledged a referendum on the subject should they win. The rapid rise of UKIP in recent months has also highlighted the popular support for euroscepticism from UK voters.
“I worry that businesses may already be less inclined to invest in Britain because of it. To my mind, this is one of several factors that contributes to my level of caution around the UK and eurozone economic outlook in the medium term,” he said.
“In particular, it is going to be very hard for the eurozone economy to confront and conquer its stagnant growth and deflationary demons, while this level of political introspection and uncertainty prevails.”
“From an investment perspective, these problems provide further vindication for a cautious long-term strategy and a focus on high quality, dependable businesses, many of which have the additional benefit of substantial global diversification.”
It is a sentiment shared by David Zahn, head of European fixed income at Franklin Templeton who says the result of the UK general election in May 2015 raises the possibility of a referendum within a couple of years on the UK’s membership in the EU and with it the possibility of greater market volatility in Europe.
“How European markets might react to the possibility of “Brexit,” which is shorthand for “British exit from the European Union,” both in the run-up to the UK election and its aftermath, remains unclear, although given that UK assets suffered as the result of the referendum on Scottish independence became less predictable such volatility could conceivably reoccur.”
The graph shows the performance of Woodford’s fund versus the IA UK Equity Income sector average and FTSE All Share in the two months before and after the historic vote on Scottish independence.
While the market sold off heavily in the few weeks before the vote on 18 September it has largely recovered although Woodford demonstrated his defensive capability by staying ahead of the sector and market.
Performance of fund, sector and index 18 June – 18 December
Source: FE Analytics
He says expects his portfolio to behave similarly in as uncertainty ramps up in the coming months and the event of a two year buildup to a Brexit vote in 2017.
While Woodford, who has exposure to European listed stocks in such names as Roche and Sanofi and significant indirect exposure via numerous mega firms such as AstraZeneca, BAE and GlaxoSmithKline, concedes there is also risk in the status quo of the UK’s position in the EU, the likelihood of a political showdown on the issue presents a more pressing threat to markets.
“Without fiscal integration, the monetary union does resemble a vortex at the heart of Europe’s troubles. The future, therefore, looks far from plain sailing for the UK economy.”
“These issues will feature prominently in the General Election and, if the Conservatives win, a referendum on Europe in 2017 is promised. Regardless of the outcome of the election, however, as the debate within Europe intensifies, we will inevitably be confronted by the need to decide,” he said.
“Ultimately, neither option looks obviously right or wrong but, from an economic perspective, I anticipate that this causes more uncertainty and potentially a deterioration in consumer and business confidence.”
Howard Archer Chief UK & European economist at IHS Global Insight agrees with the two managers that the threat of the UK leaving the EU presents a huge downside risk for the UK.
“Political uncertainty could take a significant toll on the UK economy in 2015, particularly through weighing down on business confidence and investment. This would be magnified, if there was extended political uncertainty following May’s general election,” he said.
He says it poses a significant downside risk to growth this year if there is sustained political uncertainty after the election with the UK taking at least a temporary “loss of economic traction.”
“There is the danger of a significant hit to investment if the Conservatives head up the next government and call a referendum on European Union membership. If the referendum is set for 2017 - as currently planned by the Conservatives - this would be more likely to have a dampening impact on economic activity in 2016 and the first half of 2017 than in 2015.”