As with voters themselves, the divide in the corporate sector over Brexit could hardly be more marked. The value of multinational businesses with significant international earnings has soared since the UK voted to leave the European Union in June last year – the top-performing blue chip, Glencore, rose 81 per cent over the subsequent 12 months.
Meanwhile, more domestically focused businesses, particularly those that are dependent on consumers increasingly squeezed by falling real incomes, have suffered: Dixons Carphone and Next fell 30 and 28 per cent respectively over the same period.
The bigger picture is that six months after the prime minister triggered Article 50 in March, starting a two-year countdown to the UK’s formal departure from the EU, there is still no clarity on what Brexit will look like. Negotiations have not even begun over most of the issues that will have the greatest impact on corporate interests. EU leaders are due to decide on 19 October whether enough progress has been made over talks on the exit bill for the UK and the rights of EU citizens currently living in the UK to begin discussions about a post-Brexit trade deal.
Against this uncertain backdrop, UK fund managers continue to ponder how best to position their portfolios for the years ahead. Most were taken by surprise by last year’s referendum result, and some have already felt obliged to take action accordingly.
‘We thought the vote would be supportive of housebuilders, retail and real estate, so we have had to rethink those sectors,’ says Dan Nickols, the manager of Old Mutual Smaller Companies, one fund that has adjusted its portfolio since the Brexit vote.
‘Given that some of these areas have sold off very aggressively, we have to be cautious about selling things that have already been really oversold,’ he says. ‘But we have to recognise that the outlook has changed, so we have selectively been reducing our overweight in consumer discretionary.’
Financial services is another area where investors remain deeply concerned, amid fears that the UK will fail to negotiate a passporting deal for businesses based here to sell their services to the rest of the EU.
A further concern is bank shares, which have been given the cold shoulder by some managers including Alex Wright, manager of the Fidelity Special Situations fund. ‘I have cut back my exposure because I do think the referendum means lower-for-longer interest rates, which is negative for banks,’ Wright says. He adds, however, that banks are in a strong position compared to previous times when economic growth has slowed. ‘There hasn’t been exuberant lending, there’s been an awful lot of consolidation in the sector so there’s less competition, and also balance sheets are much stronger than in the past,’ he says.
Brexit prospects not as grim as first thought
Other fund managers are more sanguine about Brexit’s impact. For example, Chris Reid, the manager of Majedie’s UK Income fund and its UK Focus fund, argues that the close result in June’s general election will mitigate some of the potentially extreme effects Brexit might otherwise have had.
‘We feel that the general election outcome is quite a good one for proponents of a softer Brexit,’ Reid contends. ‘We would define this as one where the pragmatic, economic impact of reduced European engagement is prioritised at least equally with the more ideological beliefs in tightly controlled immigration and rule-making.’
Mark Dampier, head of research at financial adviser Hargreaves Lansdown, says this more relaxed take on Brexit is broadly typical of fund managers’ current positioning. ‘UK managers fall into two camps – [those with strategies based on] value or growth momentum,’ he says. ‘Brexit didn’t really make them change dramatically, as that tends to be their investment style. However, what is interesting is that the disconnect between the two camps is at its widest since the dotcom boom.’
Dampier has a point. Amid the bull run the UK stock market has delivered since the financial crisis, there is no shortage of analysts who believe a correction is imminent, raising eyebrows at the resilience of even seemingly Brexitsensitive stocks. The strength of housebuilders, for example, seems to be completely at odds with the slowing housing market, as well as with fears that Brexit will damage consumer confidence and restrict construction companies’ access to overseas workers.
Elsewhere, the retail sector has also largely repaid investors’ faith, despite clear signals that rising inflation has begun to inhibit consumers’ ability to spend – recent profits warnings at DFS and Dixons Carphone hit those stocks, but others in the sector have held up more strongly.
There are managers who believe fears of a dramatic correction are overplayed. Most obviously, the high-profile Neil Woodford, who argued during the referendum campaign that Brexit would be more or less economically neutral, is unapologetic about some of the setbacks his portfolio has suffered in recent months, arguing that the selloff of companies such as Provident Financial and AstraZeneca has left their shares undervalued.
On the other hand, managers such as Troy Asset Management’s Sebastian Lyon continue to warn the post-referendum bounce in share prices has pushed the market to levels that are difficult to justify. Consequently he recommends moves into cash. Valuations ‘are more stretched than ever,’ acccording to Lyon.
What about fund managers who are looking for opportunities, rather than turning defensive? Darius McDermott, the managing director of broker Chelsea Financial Services, points to a couple of examples. ‘Majedie UK Income did have a lot of mid-cap exposure but is now more heavily into large caps like HSBC, BP and Shell; the feeling there is that these companies are at a decent turning point and could outperform for some time,’ McDermott says. ‘Invesco Perpetual’s Mark Barnett [manager of its Income and High Income funds] was underweight the dollar earners going into the referendum, so he suffered in the immediate aftermath, but he’s done the opposite to Majedie and gone even more domestically focused – again through bottom-up stock-picking rather than a view on the UK economy.’
In fact, Barnett is an advocate of stocks in sectors including retail, property and transport. ‘With so much bad news currently anticipated by the market, either a modest strengthening in the consumer outlook or a marginal reduction in wider uncertainty offers considerable upside potential to the share prices of domestically focused companies,’ he argues.
Little evidence of major portfolio repositioning
Ultimately, such nuances will be the order of the day, rather than wholesale shifts of portfolio positioning. While fund managers may be divided over the prospects for the UK economy in the short to medium term, including the potential impact of Brexit, there is no appetite for any dramatic strategic change of direction.
‘Most managers we respect have not made major changes on the back of the vote, as they typically target companies with globally diversified earnings and high returns on capital, rather than lowerquality, more cyclical domestic businesses,’ argues Jason Hollands, managing director of the Tilney Group. ‘They don’t try to bet on yet-to-be-known political outcomes.’
That looks sensible. In August, the UK and the EU couldn’t even agree on whether progress in the Brexit negotiations was being made – let alone on the small print of a Brexit agreement. Anyone making substantial changes to their portfolios on the basis of assumptions about the impacts of such an agreement must be a hostage to fortune.
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