Liontrust’s Russ: Fears of Brexit contagion on EU are overdone

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The contagion impact of Brexit on companies and GDP in the European Union has been overblown, says Liontrust’s new head of European income Oliver Russ, who joins from Argonaut this month, bringing two European equity income funds with him.

The European Union reckons Brexit could shave 2.5 per cent off its GDP through to the end of next year.

However, Italy’s banking crisis and its referendum later in the year are risk events to watch out for, says Russ.

If Italy chose to leave the Eurozone it would have a far more significant impact on global markets and would trigger a financial crisis, says Russ, speaking for the first time since his move to Liontrust.

“I don’t event know how you would go about untying Italy from the Eurozone,” Russ said in an interview with Fund Strategy.

Liontrust announced in April that Russ, who had been lead manager of the £169m Argonaut European Income fund and the £131m European Enhanced Income fund, would move to the asset manager, taking the two funds with him.

Russ now manages the renamed Liontrust European Income and European Enhanced Income funds, which is hedged into sterling. While this meant it suffered post Brexit, he believed the currency had now suffered the worst of its post-Brexit weakening.

An economic downturn in the UK would have limited impact on EU corporates as a whole as the UK only accounts for 10 per cent of exports, Russ says. The exception is Ireland, which exports 31 per cent to the UK, more than the UK’s domestic sales, which sit at 26 per cent.

The Netherlands and Spain are the next most exposed with 6 per cent of exports going to the UK.

“Earnings are very correlated to GDP. If Europe can continue to grow, you should see those earnings pick up,” Russ says.

“Post Brexit, they were very quick to take the knife to GDP, I don’t think that is justified because they don’t have that many sales to the UK. If the UK goes into recession it’s not going to knock the whole Eurozone back.

Russ adds: “They might be slight beneficiaries of companies wanting to move into Europe or new investment going to Europe rather than the UK.”

Russ says the 10 per cent drop in currency would mean that trade tariffs would have a limited impact on British exports to the EU.

However, he says if the EU does experience any existential crisis sterling may rebound.

Russ says there is a “folk memory” among UK investors that Europe is a low yield market. “That’s absolutely not the case and hasn’t been for decades.”

Dividends in Europe ex-commodities are estimated to be 3.9 per cent in 2016 compared to 3.8 per cent for the UK, according to figures from JP Morgan.

The advantage in Europe was that a wider selection of companies to choose from offered wider diversification.

“The UK has a problem in that a huge amount of its dividends are related to US dollars and resources. The good thing about Europe is it’s a much more diverse index so you’re much less reliant on any one sector,” Russ says.

Equity income had been a less popular sector on the Continent as investors have traditionally turned to bonds for income and equity for capital growth, Russ says.

“Because the Europeans themselves don’t invest much in European income you do get some surprisingly high yields that I think over here would be chased down by the income funds.”