Uncertainty and opportunities aplenty: Brexit one year on

Today is the first anniversary of the Brexit vote and perhaps no one could have predicted where UK would be now and all that happened in the interim. International Investment’s sister publication InvestmentEurope has been gathering the reactions of industry commentators across Europe as the UK marks one year of its Brexit vote.

Sterling’s steep decline
“Sterling’s devaluation in response to the shock UK referendum result has been the most significant market event in recent years. It has yet to materially recover from its post-referendum low and now remains vulnerable to even more political and economic uncertainty. However, this year’s General Election result seems, at least, to have mollified some of the UK Government’s hard Brexit rhetoric, which has shifted to being more pragmatic and conciliatory. Uncertain domestic politics, economic cloudiness and more ambiguities around Bank of England policy lead us to maintain an underweight allocation to UK assets.” – Graham Bishop, Investment Director at Heartwood Investment Management.

Highest level of volatility
“In the last 12 months we’ve doubled our investor base across Europe, which now represents more than €10bn in AUM. We have seen increased investor interest from the UK, continental Europe and the US for both EU and UK commercial real estate investment opportunities. At the same time, our deal sponsor base doubled, which shows that the complexity and volatility induced by Brexit has become a major concern for both investors and sponsors, and thus an opportunity for an investment platform like BrickVest. We expect to see the highest level of volatility from the office sector as many international firms currently headquartered in the UK put decisions on hold over their long term office space requirements. Indeed our research showed that 20% of property-focussed institutional investors believe the office sector will present the biggest European real estate investment opportunity.” –Emmanuel Lumineau, CEO at BrickVest

Outlook for bond markets
“My global bond strategy has generally underweighted sterling exposure since before the Brexit vote (I’ve long been worried about the UK’s current account deficit), with preferred currency exposures that have included a sizeable (but reduced in the wake of the large ‘Trump bounce’) allocation to the US dollar. Within bond markets, my favoured exposures include US dollar-denominated floating rate bonds from blue-chip banks and financial issuers, largely as a play on the strengthening US economy and rising US interest rates. I’ve lately reduced some corporate bond exposure within my funds – not because default rates have become worrying (they remain very low), but because they’ve performed so well over the past year and valuations have become less attractive.” – Jim Leaviss, Head of Retail Fixed Interest at M&G Investments

Impact of Brexit on UK fund sectors
“The UK election has resulted in a slight uptick in fund volatility in equities sectors. However, in context of recent events, the actual Brexit vote and then the US elections appear to have been much more significant. Even the more volatile UK small and midcap sector (grey line) has only seen a comparatively modest pickup in volatility since the UK election, compared to the Brexit vote. The general trend in volatility since the Brexit vote has been down, suggesting that investors will place considerable weight to the outcomes of the EU departure rather than geopolitical events themselves.” – Jake Moeller, Head of Lipper UK & Ireland Research at Thomson Reuters Lipper

Data view on Brexit
“A network for electronic trade ideas and investment recommendations, said analysis of trading data since the Brexit referendum suggested that the outlook for UK stocks was more pessimistic than optimistic, when comparing data from a year ago to today. In June of 2016 overall enthusiasm for UK stocks was nearly identical to enthusiasm for EU stocks within our network. In fact, the long/short ratio was actually quite bearish for both – given our historic average of two long ideas for each short idea.  Overall we saw about 1.2 long ideas authored for every short.

“Looking at today’s values, one can see that continental Europe has rebounded significantly, much closer to historical figures, with more than 2.5 longs distributed for every short.

“The outlook for UK stocks within our network remains daunting. Overall sentiment has had a few positive bumps here and there over the year, but pessimism has returned thereafter, and the overall aggregate numbers are almost exactly the same now as last summer with about 1.2 long ideas authored for every short.

“At the moment the ratio of longs to shorts is twice as high on the continent as it is in the UK itself, which results in a 17% difference in the amount of alpha our predictive analytics projects is available in EU stocks on average than their UK counterparts.” –William Herkelrath, business development manager at TIM Group

Gilt yields have drifted higher
“The BoE’s emergency rate cut following the Brexit vote significantly steadied market sentiment, with both conventional and real Gilts falling sharply following the vote. Since the lows of August 2016, Gilt yields have drifted higher, however they remain below their pre-referendum average level. The combination of the BoE’s interest rate cut and uncertainty over the UK’s future relationship with the UK has weighted on Sterling, with the Sterling Trade Weighted index remaining some 13% below its pre-vote level. The sugar rush of a falling currency has supported the UK equity market, with the international focused FTSE 100 especially benefitting from the large number of USD and non-GBP earners within its constituents. Looking ahead it does seem like markets and central bank policy makers are operating in a period of high uncertainty, with the next move in both interest rates and bonds yields likely to be highly dependent on an opaque political backdrop with the UK government not in full control of the process.” – Shilen Shah, Bond Strategist at Investec Wealth & Investment

Uncertainty rife, but opportunity knocks

“Uncertainty is rife one year on from the Brexit vote – we could of course see the government forced into calling another election, as well as facing multiple stumbling blocks during negotiations with the EU.

“The UK will likely continue to try to become an attractive environment for overseas businesses to invest in. If the country is fearing a drop in investment from Europe, it will be important to open up to other overseas markets, and for this it will need to have a favourable background for business. This means corporation tax will likely remain at a competitive level, and we are unlikely to see anything substantial happen with UK interest rates.

“Inflation may continue creeping up, and over the longer term I believe the pound will recover, but for now there is the opportunity to take advantage of some depressed share prices – especially when it comes to stocks linked to the domestic economy such as retailers and construction firms, where we currently see high yields and selling at low multiples.

“Of course there is constant market uncertainty in general, but there are also opportunities. Provided the economy stays reasonable, Sterling remains at a lower level and corporate tax rates stay low, I think the market opportunities are far greater than the potential problems.” – Paul Mumford fund manager at Cavendish Asset Management

ABOUT THE AUTHOR
Gary Robinson
Deputy Editor, International Investment and Head of Video at Open Door Media Publishing. A fully qualified journalist and filmmaker with more than 20 years' financial services experience, both as journalist and originally as an IFA.

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