Much has been written about how the UK’s exit from the EU might look ever since the Brexit result was announced in June 2016.
The result sent sterling plummeting, while UK indices have since lagged the rest of the developed markets, although returns have been more robust than some were expecting.
Indeed, the FTSE All Share has returned 30.67 per cent since the referendum, 15.15 percentage points behind the wider MSCI AC World index.
Performance of indices since EU referendum
Source: FE Analytics
While the market has rebounded, investors have remained concerned throughout the period with international investors largely shunning the region.
However, Philip Webster, manager of the five FE Crown-rated F&C European Growth & Income, said from a European perspective the outcome is likely to be muted.
“If you sit in front of clients, [they] have generally been more concerned about the US than they have been about Europe,” he said.
Indeed, having outperformed for much of the last decade investors have more recently been concerned with the high valuations of US stocks than the political uncertainty in Europe, he noted.
“I think if you are in Europe you kind of get used to the politics thing and Brexit and the constant noise because it is there in your face every day,” Webster said.
However, he added, international investors tend to make more of the short-term noise than domestic investors.
And those that sold out of Europe for political reasons last year, such as the German and French elections, may have missed out on some good returns, as both events ultimately proved to be reasonably market-friendly.
When it comes to the Brexit negotiations, he said that investors are also looking at the short-term headlines, rather than the long-term.
“I don’t think Brexit will be as catastrophic as everyone says it will be, but there has to be something to write about and often it is the negative thing because it can be slightly self-fulfilling,” he said.
However, for international companies such as automobile manufacturer BMW it does not matter whether they are in Berlin or Leeds, Webster explained, they will still need to trade between the two.
“Fundamentally we are trading with each other – we are the same entity – so how can it affect one and not the other? It can’t,” he said.
“We trade with each other and companies want to trade with each other. The politics thing is always going to be there and will be the thing people will hear about.
“But fundamentally there are 'open skies' so do they want to stop flights going around Europe or landing in Heathrow or Paris? No.”
Performance of fund vs sector and benchmark since manager start
Source: FE Analytics
Therefore, concerns over whether or not an agreement has yet to be struck or issues such as the Irish border, while important, that are not going to get in the way of trade, he argued.
Webster noted: “Do they want to affect us buying and selling goods across Europe in a way that benefits all business? No, that doesn’t make sense either.”
Overall, he said that there will be an agreement which will ultimately be slightly in favour of Europe but that will benefit both parties.
This is because the whole concept of the EU hinges on the countries being better inside the bloc than outside.
He said: “They [EU officials] have banked on Europe winning and this whole symbiotic relationship with one fiscal union and one currency, so if they say that doesn’t matter then there is no point in Europe.
“However, fundamentally when it gets to the line they want companies and they want the economy to do well and frankly we need each other whether you like that or not,” Webster added.
“I cannot imagine a scenario where it is 20 per cent more expensive for us to trade with Europe and vice versa, that would be a very negative scenario for both although how that would play out I do not know.”
While the manager has largely put the noise of Brexit to one side in his portfolio, he acknowledged that some things have needed to be addressed.
For example, while the skies may remain open (as mentioned above), Ryanair has had to apply for a separate UK licence.
Other, more headline-grabbing events, such as whether UBS will have its headquarters in Frankfurt, London or Paris, will not affect his thinking.
In the UK, the market and investors have reacted slightly differently and Guy Anderson, manager of the Mercantile Trust, said he has had to adapt his portfolio accordingly.
“For us, what we are focusing on very specifically is the outlook for companies that are in the portfolio,” he explained. “One of the things that we do in our investment process is we meet companies [to] check with them on where they think there are risks in terms of the process [and] in terms of what it might mean for their access to raw materials, to labour, their currency exposures et cetera.
“As things move and hopefully fall into place, we can tick [those] off but we are keeping a very close eye on the currency exposure within the portfolio because that is something that could - if not monitored closely - could add some unintended risk to the portfolio.”
Performance of trust vs sector over 5yrs
Source: FE Analytics
Indeed, a double-digit fall in sterling following the referendum result caused huge distortions in the market between domestic earners, which plummeted, and international earners, that benefited.
“We have 50 per cent of the revenue generated in the portfolio domestically and about 50 per cent is internationally, which means we have a marginal tilt relative to the benchmark away from the domestic economy and are slightly more exposed to international,” Anderson said.
“By default, we are slightly positioned for a less positive outcome I would suggest but it is very much a nuance rather than a strong position.”
While Anderson would like to think the process of exiting the EU will be flawless, he said there is going to be much noise over the coming months, and although little will be game-changing he stands ready to make changes where appropriate.