There has already been a great deal of commentary from UK fund managers regarding June’s EU referendum result.
The market’s behaviour since then has taken many investors by surprise, with the FTSE 100 reaching a record high after the fall in sterling bolstered the returns of global-facing stocks.
Performance of index since 23 June 2016
Source: FE Analytics
However, many managers are warning we will not begin to see the true impact of Brexit until April next year when Article 50 is officially triggered.
While investment professionals haven’t been shy in predicting how this will affect their home market, UK investors may well be wondering what impact it will have on other areas of their portfolios.
In the below article, Rathbones’ James Thomson, Newton’s Sophia Whitbread, Miton’s Nick Ford and AXA Framlington’s Dani Saurymper discuss how the referendum has affected their returns so far and what investors can expect over the medium term.
James Thomson: “It will be a strong headwind for the UK economy”
FE Alpha Manager Thomson, who runs the four crown-rated Rathbone Global Opportunities fund, says sterling’s weakness has been a “real gift” to his portfolio given that 85 per cent of it is weighted outside of the UK.
Year-to-date, the fund has returned 20.1 per cent while its FTSE World benchmark is up 28.41 per cent.
Performance of fund vs sector and benchmark in 2016
Source: FE Analytics
“I think it’s a little early to say what the medium- to long-term effects of [Brexit] will be, but some of the economic data recently has not shown the kind of weakness people were expecting post the Brexit vote,” he said.
“So, I think the natural inclination is for people to say this has all been overblown and we should go back to business as usual.”
“I still think this will be a pretty strong headwind for the UK economy, even if it’s in areas where you don’t see it; where investment decisions would have been made but they’ve been further delayed before going somewhere else. It’s almost the absence of growth that may be a problem.”
Thomson has reduced his UK weighting from 25 per cent to 15 per cent over the course of the year and has reallocated this capital to holdings in the US.
“The very topical issue at the moment in the UK with sterling weakness is to get ready for inflation, that’s the message a lot of people are sending,” he continued.
“When sterling weakens and you buy your products in dollars, suddenly the cost of that product goes up and the expectation is that retailers will pass along the price increase to the consumer.”
However, he believes many companies will be able to curb the effects of inflation through means other than hiking product prices. For example, he points out that grocery wholesalers often reduce the individual quantities of their products as opposed to transferring any price increases to the end consumer.
Sophia Whitbread: “It highlights a trend for more nationalist policies”
Whitbread, who heads up the Newton Emerging Income fund, has also benefited from the fall in sterling. Since the start of the year, her fund has returned 42.05 per cent, outperforming its sector average by 135 basis points.
Performance of fund vs sector and benchmark in 2016
Source: FE Analytics
She says the fund has limited domestic exposure as the only UK-listed stocks it can hold must derive the majority of their earnings from emerging markets.
However, she says certain areas of the developing world have a significant exposure to the UK. Asian countries such as Taiwan and Korea, for example, are home to a number of large manufacturing companies that export to Britain.
“Broadening the Brexit issue to Europe as a whole, parts of central and eastern Europe have benefited hugely from supplying to German manufacturers. For example, a lot of Polish exports go to Germany, a lot of Czech Republic exports go to Germany,” the manager explained.
“If we think of Brexit as raising more questions about the future of Europe as a whole, I think this is an area where we would probably see some vulnerability.
“But for the fund as a whole and for emerging markets as a whole, I think the Brexit process highlights that it isn’t unique – clearly we have other areas with prominent anti-EU parties. I think it highlights a trend for more nationalist policies away from globalisation, making it an elevated risk environment.”
“One of the things we think that does is push out the rate-tightening cycle. That’s not to say we won’t see any rate-tightening, but we do think it will be slower and less significant than some market commentators have suggested.”
Nick Ford: “The US is pretty insulated from [Brexit]”
Ford, who co-runs the four crown-rated Miton US Opportunities fund alongside Hugh Grieves, says the US is reasonably sheltered from any Brexit-related fallout, given that exports account for only about 14 per cent of its GDP.
In contrast, he says exports account for approximately 45 per cent of Germany’s GDP and 28 per cent of the UK’s GDP.
That said, the manager holds some US firms that have made acquisitions in the UK – chiefly car dealers, which is an area he believes will be one of the major growth sectors over the next 10 to 20 years.
“We have companies that are making acquisitions in the UK, so some of their share prices have been marked down as a result of unfavourable currency translation,” Ford said.
“What’s really interesting from our point of view is that, we all know sterling is fairly weak, but is the euro going to become weak as well? Is the dollar going to get another leg-up? Is the DXY [Dollar Index Spot index] going to be strong against other currencies across the globe?”
“That has an impact on the way we think about investing in our fund because quite a lot of small and mid-cap stocks are relatively isolated from a stronger dollar, which creates unfavourable currency translations for the big multinationals.”
Ford points out that this is likely to be positive for Miton US Opportunities though, given that it has a bias to stocks further down the cap spectrum.
As with the aforementioned managers, he says the fund has also benefited from the weakness in sterling. It has returned 32.88 per cent in 2016 so far, compared with its sector-average return of 24.75 per cent.
Performance of fund vs sector in 2016
Source: FE Analytics
“I think from a general US point of view, it’s really not a big issue for us. In the US, we’re pretty insulated from it,” the manager added.
Dani Saurymper: “The US election has far more bearing”
Manager of AXA Framlington Health Dani Saurymper says the EU referendum has had a limited impact on the positioning of his portfolio.
He has a relative overweight position in UK healthcare stocks at 9.69 per cent versus his MSCI World Healthcare index’s weighting of 6.26 per cent, although this is due to bottom-up fundamentals rather than a top-down call on Brexit.
“From a UK specific perspective, [sterling weakness] has been a big tailwind, primarily for the larger UK-based names. They have a larger UK cost base but significant revenues from the US, so they get a tailwind from the weakness we’ve seen in sterling,” the manager explained.
“In terms of the yield curve, you still have the likes of GlaxoSmithKline on 4 or 5 per cent dividend yields, so if you have a continued and sustained ‘lower for longer’ rate environment, it will continue to hold appeal.”
“A tailwind that could come, which we haven’t yet seen in more protectionist commentary from Teresa May, is the potential for M&A following the dilution of sterling in value versus the dollar.”
“There are certainly smaller companies that may now be more appealing by virtue of the fact that the fire power that US players have has increased.”
Year-to-date, AXA Framlington Health has returned 12.22 per cent compared with its benchmark’s return of 14.1 per cent.
Performance of fund vs benchmark in 2016
