Investors are growing increasingly expectant of a Brexit following the UK’s referendum in June, according to the findings of the latest Risk Rotation Index by NN Investment Partners*.
Still, a minority (27%) of investors believe that the UK will leave the EU, slightly up from 20% when asked the same question in July 2015.
Overall risk appetite amongst investors remains positive at +5.3%, with 28.7% having increased their appetite over the past six months compared to 28.8% in Q4 2015. However, 23.4% of investors claim to have decreased their appetite to risk in the last six months – up from 15.4% in Q4 2015. This could be a result of the uncertainty over the UK’s membership in the EU, with investors citing a Brexit as the highest risk to their investment portfolios, with a third (33%) viewing it as ‘significant’. One in nine (11%) view it as a ‘very significant’ threat.
While a greater number of investors anticipates a Brexit, some complacency seems to have crept in. There is a greater number of respondents who believe that it would have a beneficial impact on European financial markets. One in 11 investors (9%) now believe that the UK leaving the EU would have a positive impact on European markets, compared to 6% in 2015. Furthermore, less than two thirds (60%) now believe that it would have a negative impact – compared to 75% last year. More than a quarter (27%) of respondents don’t believe it to have any significant impact at all.
In spite of the growing expectancy of Britain exiting the EU, investors appear unwilling to adapt their portfolio accordingly; only 14% of investors who have taken any measures to protect their portfolios against the risk of a Brexit, while four fifths (80%) claim they have maintained their existing positioning.
Investors appear to be torn between sentiment and rationality when considering a Brexit; while a growing number appear to be bracing themselves for a divorce between the UK and EU, few seem to be preparing their portfolios for this eventuality. While it is widely reported that a Brexit will have negative consequences, it is impossible to predict how bad they will be and whom they will affect. With polls giving little indication of how the vote will go, one thing that is certain is that there will be elements of uncertainty, indecision and even complacency creeping into investors’ thoughts as the 23rd June approaches.
When looking at overall risk, and in line with the slightly more risk-averse attitude being adopted by investors, defensive equities remain popular, with Healthcare (53%), Technology (47%) and Consumer Staples (39%) remaining the most popular sectors.
When it comes to an analysis of investors’ views on geographical regions in terms of risk versus return, most continue to believe that the best opportunities lie within the US, with 82% of investors selecting it as favourable and 28% ranking it as the most attractive region overall. Emerging Markets are the second most popular geography, being selected by 73% of respondents, with the Eurozone in third with 70%.
While investors may not necessarily be bracing their portfolios for a Brexit, there does appear to be a slightly more cautious outlook in markets, with a strong preference for defensive sectors. The fact that commodities remain unloved is at odds with investors’ preference for Emerging Market equities and we believe that this defensiveness is, to some extent, reflected in the fact that the US is viewed as the most attractive region.
* Findings revealed in NN Investment Partners’ own research carried out in a survey by Citigate Dewe Rogerson amongst 94 international institutional investors in February 2016
Patrick Moonen is principal strategist at NN Investment Partners