Nearly half (42%) of UK equity fund managers have said their portfolio’s will be sensitive to the outcome of Brexit negotiations.
A Square Mile survey found that while one third (32%) of respondents thought it would not be possible to determine how their fund’s relative performance would be impacted, over one quarter (27%) thought the performance would be broadly unaffected by outcome of Brexit negotiations. It surveyed managers of UK equity funds with a Square Mile fund rating.
Ryan Hughes, AJ Bell said the UK stock market, particularly the FTSE 100 Index, can be very susceptible to currency movements between sterling and other major currencies. “It is in these currency markets that we are seeing the clearest view of what investors think of where Brexit is heading and this in turn is and will translate into increased volatility for UK equities in the run up to the end of March next year when we should know whether there is a deal or not,” Hughes said.
“As a result, any investors with exposure to UK equities should be prepared for a heightened period of volatility.”
Fund managers in the dark about Brexit
Nearly four in ten (39%) UK equity managers said it was impossible to determine what effect Brexit would have on the FTSE All Share index over the next 12 months.
One in ten (10%) managers suggested a hard Brexit would be the most favourable outcome for index, 39% thought a soft Brexit would be the best outcome and 13% said it didn’t matter either way.
Hughes said he was in the it’s ‘impossible to determine’ category as it is entirely possible that sterling takes a hit on a hard Brexit which could boost the FTSE 100 in the short term.
He said: “Many investors learnt a lesson at the time of the Brexit referendum when they positioned their portfolio for a particular outcome, convinced that it would happen, only to see the alternative result comes.” He expected positioning would be more cautious this time around, particularly given uncertainty surrounding Brexit negotiations.
The variety of responses underlines the complexity of the issue and uncertainty of the outcome, according to Jason Broomer, head of investment at Square Mile investment consulting and research. Broomer listed no Brexit as another potential outcome. “This could be a risk to many funds relative positioning and a reversal of the market moves in June 2016 seem a realistic possibility.”
Don’t focus on Brexit
However, from a pure investment perspective, he said once investors know the result, the focus will shift away from Brexit and onto the fundamentals of the UK economy and profitability of companies, which drive valuations in the medium term, said Adrian Lowcock, head of personal investing at Willis Owen.
“But in the short term the pound is likely to suffer more from a hard Brexit, whilst you’d expect stock markets to follow suit in the immediate aftermath. But over 12 months a weaker pound could provide support for the stock market which, even within the FTSE All Share, has a global focus.”
Lowcock said investors shouldn’t focus on Brexit, but instead build a portfolio capable of weathering any Brexit storm.
Laith Khalaf, senior analyst at Hargreaves Lansdown said: “The bottom line is, no-one knows, so the answer is for investors to maintain a balanced and diversified portfolio.”
