Investment committee: What is the impact of Brexit on UK markets?

SuterLauraLaura Suter is editor at Fund Strategy

The result of the EU referendum was a shock to most, not least of all the markets. The days following the result saw stock price falls across the globe, with sterling taking the brunt of the sell off in the UK. However, most markets have rebounded, at least partially, and have returned to a more stable footing.

Property funds have now been hit following the vote, with asset managers initially imposing higher charges to stem outflows and then gating funds when liquidity ran out. The speed at which redemptions picked up and cash ran out is another example of investor nervousness following the referendum.

The Bank of England has been a steadying hand since the result was announced, with governor Mark Carney allaying some market fears. He did so initially by pledging more liquidity, and now by urging banks to use capital reserves to boost lending to businesses and individuals. But all eyes are on the Bank and its monetary policy committee after interest rate expectations have priced in a cut to 0.25 per cent in the coming months. Carney has made no secret his views on negative interest rates, and the impact they would have on the already hard-hit banking sector, but has not ruled them out entirely.

John Husselbee Liontrust HusslebeeJohn Husselbee is head of multi-asset at Liontrust Asset Management

It looks increasingly clear that – for now at least – we are facing a political rather than a financial crisis.

Sterling has taken the brunt of the Brexit panic and has effectively acted like the share price of UK plc. Sterling weakness should also be considered in light of ongoing demand for gilts, which has pushed 10-year yields below 1 per cent for the first time. On the surface, this presents something of a conundrum: people are shunning our currency but still want our debt. Investors are clearly seeking safe havens and, in the beauty parade of developed market government bonds, gilts still look attractive versus other European government paper.

We are nowhere near the crisis of 2008 in financial terms. Politically speaking, however, we may well be in uncharted territory.

Amid an extended period of political uncertainty, we predict financial markets will function in an orderly fashion as central banks stand behind them. The measured response from the Bank of England so far looks set to continue, with many predicting an interest rate cut in August.

WEB_DecJan_Cockerill, TimTim Cockerill is investment director at Rowan Dartington

No one thought we’d leave the EU, not even the Leave campaign.

Markets have behaved in a predictable fashion and I suspect investors can be split into two camps: the wrong-footed and the smug. What is striking is the extreme reaction of some sectors. UK housebuilders fell 40 per cent – is that realistic? We think not, and that rational thinking will resurface.

The panic that has caused many UK commercial property funds to suspend trading was a surprise. This last happened in the global financial crisis. Brexit is not on the same scale.

UK equity sectors played out the referendum result as most investors expected, with overseas dollar earners up and UK domestic plays down. The currency was a big factor in this, as was the repositioning by investors set for a Remain victory.

The EU is about so much more than the economy, and it’s only once we’ve agreed our exit strategy that we can negotiate terms of trade. Investors will be wary of over-committing to UK domestic stocks, but that’s not to say they won’t continue to generate profits and grow.

Lowman-PeterPeter Lowman is CIO of Investment Quorum

Clearly, some parts of the UK market suffered a bigger impact than others from the referendum outcome. Housebuilders, banks and consumer-led companies fell heavily on the day after the Brexit poll.

The pound fell heavily as international investors became concerned about the ramifications of Brexit, and the UK political arena, while the Bank of England governor had to stabilise the situation with talk of further monetary actions.

Consequently, the FTSE 100 index has now recovered from its initial losses as investors take the view that weaker sterling will be hugely beneficial in corporate earnings for many of those multi-national companies. Mid and small caps are still suffering from being labelled as more domestically driven despite more than 50 per cent of their corporate earnings coming from overseas.

In the short term the important questions to be addressed are: Will article 50 be invoked? Will interest rates be cut? And is sterling heading for parity against the US dollar, which will have ramifications for both imports and exports?

Deverell-Mike-2010-700x450.jpgMike Deverell is investment manager at Equilibrium Asset Management

At the time of writing the FTSE 100 has staged a remarkable recovery from the dips after the referendum result.

Some take this as a sign that Brexit is a load of fuss about nothing and prophecies of economic doom have been much exaggerated. Unfortunately
I am not that optimistic.

For a more representative indicator of how market participants see Brexit affecting the economy, we are better to look at gilts, where the yield on the 10-year bond has dropped from about 1.5 per cent to about 0.85 per cent. Bond investors expect the Bank of England to drop interest rates to 0.25 per cent and not increase them again for four years.

The outlook is at best uncertain and it makes sense to hold more cash than usual. UK commercial property, already slowing before the referendum, is best avoided completely.

One area we are more positive about is index-linked bonds, with inflation likely to rise as a result of the falling pound. We also like selected “alternative” funds that can go both long and short on equities, bonds and currencies.

WEB_DecJan_Calder, JamesJames Calder is head of research at City Asset Management

It is a consensual view that the UK market had not expected the British electorate to vote Leave. Markets were blindsided and reacted accordingly, with the FTSE 250 suffering the most as it is the bellwether for the UK’s real economy.

At the time of writing the UK market has made a strong recovery, particularly within large cap, although mid cap is still nursing some wounds. I am vexed with the question: is this a “dead cat bounce”? It certainly has some of the hallmarks and one has to question the earnings outlook for those companies heavily geared into the real economy.

The major challenge is whether the UK enters a recession in the short term. At this point the likelihood is surely greater than it was in the week before the referendum. My view is that the UK outlook has weakened, but I remain comfortable with my exposure being reflected through a mix of defensive and eclectic managers.

We have bought some specialist closed-ended vehicles but for the most part have been increasing our exposure to defensive assets.

WEB_DecJan_Davis, JonathanJonathan Davis is managing director of Jonathan Davis Wealth Management

Wall-to-wall, the mainstream media and UK fund managers say the markets are volatile because of Brexit. Sure, a little, if you look at the ultra short term. There’s always news to move markets, and this month’s news is Brexit. As far as I am concerned, nothing has changed in the markets.

Sterling has been falling for two years, or nine years or 100 years, depending on your point of view, and it continues to fall.

Gilts have been rising for three years and they continue to rise, while yields continue to fall. Looking further out, 10-year rates will probably go negative over the next year or so. The FTSE has been flat to down since 2013, and in fact is where it was in 2011, and the trend continues to be down.

The idea that the exit vote has caused any of this is laughable. Brexit is yet another catalyst for risk-off investing, not a cause.

So, for UK assets, continue to follow the trends. Gilts up, sterling and stocks down. If you have to be in stocks, go for utilities. Better still, look to US assets as the dollar continues its bull market, boosting returns for sterling-based investors.

Independent view:

Bell, Mike_700x450Mike Bell is global market strategist at JP Morgan Asset Management

The EU exit vote will deliver a negative hit to the UK economy. Uncertainty over Britain’s future trading relationship with the EU and London’s ability to remain the EU’s financial services hub are likely to lead, at best, to many firms stalling hiring and business investment plans.

Given the regulatory and logistical challenges of relocating parts of their businesses, some firms could decide that it would be imprudent to wait until the last minute of the negotiations to make their decision. Decisions regarding some jobs and investment moving to continental Europe could therefore be made before any deal is negotiated, unless Britain’s place in the single market can be guaranteed in the near future. Unless there is a significant shift in policy from the rest of Europe, incompatible claims that the UK can have both full access to the single market and impose restrictions on freedom of movement will provide little reassurance to businesses.

The UK stock market is not a very good reflection of the UK economy. Over 70 per cent of FTSE 100 revenues come from abroad. We think the UK economy will be hit harder than others and that sterling could fall still further; this should favour companies that generate most of their revenues abroad.

This implies a preference for large-cap equities over the more domestically exposed mid and small caps. UK-listed tobacco, healthcare, energy and personal goods companies all have small exposures to the UK economy and have attractive dividend yields in a now even lower-yield environment for bonds.