While the precise impact of a Brexit is very difficult to predict, Pure Group acknolwedged, it is possible to predict with better accuaracy the likely impact on certain macro economic factors, like the outlook for default spreads.
To this end, the fund research house has selected a number of macro factors that will be influenced in one way or another or, in the case of default spreads, magnified by the outcome and looked at how sensitive funds are to changes to that element of the equation.
According to the firm, 3.8% of UK equity funds will be negatively affected by default spreads, while 40.6% of the funds are neutral and so, relatively indifferent to any expansion in spreads.
“Notably we would expect funds like Henderson UK Alpha, L&G Growth Trust, and Fidelity UK Opportunities Fund to have a positive relative contribution to their performance during this period as they have positive sensitivities to UK default spread movement,” the firm said in a new research report.
However, the firm does highlight that not only are the longer term impacts of a vote to leave unknown, but also there is a great degree of other risk around at the moment.
The global economy is fragile, the firm noted pointing out that the IMF has stated that global growth could trend lower if: The tighter financial conditions and low inflation rates in advanced economies prevail; higher U.S. interest rates result in stress in emerging markets; there is a sharper-than-anticipated slowdown in China, which could depress global economic activity and commodity prices; risks emanate from geopolitical shocks and terrorism.
PureGroup said: “There is a fairly high degree of certainty that one or more of these points will materialise in the coming months leading to more volatility and uncertainty.” All of which serves to highlight the importance of having a clear understanding of how the ‘real world’ interacts with that of funds.
Indeed, the uncertainty both leading up to and post the referendum is expected to lead to a contraction in term spreads, which should benefit 29% of UK equity funds.
But, it added: “In the near-term, this positioning may not be advantageous, as term spreads are unlikely to expand. This is because the strong demand for UK long-term gilts is likely to persist, regardless of the outcome on June 23rd, which makes it improbable that long-term yields will rise.”
The third factor focused on by PureGroup is the outlook for short-term rates. This outlook is more uncertain because, it said, these rates are closely influenced by monetary policy.
“In case of a Brexit, the direction for policy rates is uncertain as it is unclear whether the BoE would be prepared to tolerate above-target inflation and stimulate growth or hike rates to counter rising prices,” the firm said, adding that around 30% of funds are affected negatively, while another 30% positively.
Over 70% of the funds are likely to be neutral to changes in underlying inflation, the firm added.
