Heads or tails? If polls are to be believed, the outcome of the Brexit referendum in June is anyone’s guess.
Apollo multi-asset manager Ryan Hughes says: “It’s either a yes or it’s a no, both of which have very different implications when it comes to portfolio positioning, which actually makes positioning for the vote very difficult.”
Hughes explains someone betting on a vote to leave would likely take a defensive portfolio position, with limited exposure to sterling and possibly to UK equities.
“Obviously if you have that position and the vote is to remain, you’re likely to lose quite a bit of money.”
Hughes has invested in global equities fund Polar Cap Global Insurance in US dollars as part of what he calls a sterling weakness position, rather than an explicit Brexit position.
Post-referendum volatility is the one outcome investors should be prepared for, even if Britain votes to keep the status quo, he says.
“Inevitably we would see an instant sharp reaction, and then we’d be in for a period of an initial three to six months of heightened volatility.”
If the electorate does vote to leave, the Government has two years to renegotiate its relationship with Europe. A statement released by Liontrust said this process would be an “unprecedented, daunting and costly prospect”.
Banks, retail, financial services and insurance are some of the industries that would be most hit by an out vote, according to Columbia Threadneedle head of equities for Europe Leigh Harrison.
“Trying to predict whether it will be a yay or nay over the next 12-week period is really a bit of a mug’s game.”
He says the equity market would be hit by a weak sterling and lower growth expectations. While a lower sterling may benefit 75 per cent of the UK’s earning base that comes from outside the country, Harrison says the longer-term unwind from the benefits of being in Europe would be a headwind to longer term growth.
For those taking a fundamental approach to their portfolios, the lead-up to Brexit is a much more stress-free affair.
Liontrust economic advantage team co-manager Anthony Cross says: “The bottom line is that we’re not staring at our portfolio trying to scratch our heads and think about what is going to happen. We think our companies can deal with it because of their barriers to competition.”
Liontrust seeks those barriers through a mix of strong intellectual property, good distribution networks and high contracted recurring income. Healthcare, pharmaceuticals, engineering, consumer goods, and software are some of the sectors Cross favours.
He turns to Unilever or Diageo for their global footprint, and support companies such as Compass Group for their recurring income.
When it comes to fixed income, Nathan Sweeney, who runs the Architas multi-asset active range, has found comfort in the US dollar through high yield.
He says: “A particular fund that we’re added to is the UBAM global high yield solutions and they use a lot of credit default swaps. Basically they’re using derivatives to gain exposure to high yield.”
Neuberger Berman high yield is another fund he is invested in.
Sweeney points out it is important to consider the impact of Brexit beyond the UK. “If the UK decides to leave, that would open up questions for a lot of peripheral European countries. So what happens to Greece, does Portugal decide to leave, what happens to Ireland, which is a big trading partner with the UK. That to my mind would put pressure on peripheral bonds in Europe. That would also put pressure on peripheral European equity markets. You could see the Greek stockmarket fall, the Portugese stockmarket fall.”
Sweeney says Architas is seeking managers taking a defensive position and only investing in core Europe.
A recent poll of advisers by GAM examined Brexit in the context of wider global instability and geopolitical risk. Politics, including Brexit risk, was the biggest risk factor for 2016 for 34 per cent of those surveyed, followed by global economic recession at 22 per cent, the euro crisis at 16 per cent and Chinese debt implosion at 14 per cent. A liquidity crash and the risk of the Federal Reserve lifting rates too quickly were also seen as risks.
Investment Quorum chief investment officer Peter Lowman says clients are not unduly concerned. He says: “They tend to ask the question, should I be voting yes or no, and we’re non committal on that.
“With Brexit if you get a no vote, like we’ve already seen, it’s had a big hit on currency and that will probably continue and we could see the dollar-sterling rates down but if you get a yes vote, you get a subsequent recovery in the pound, so trying to predict whether it will be a yay or nay over the next 12-week period is really a bit of a mug’s game.”
Whatever the case, the mantra is expect the unexpected. As Hughes bluntly points out, there is a lot of waiting time ahead. “There’s a long time between now and June, there’s a lot of politics to be seen, a lot of rubbish to be written and a lot of falsehoods and claims to be made.”