Brexit preparations
Hanbury has only made minor changes to his fund in the run-up to the vote. “I have done a little on the margins. In a few of our UK mid-cap names where we felt that valuation was close to trimming anyway, we have taken some money off the table,” he says.
Some investors, such as Mark Glazener, a global equity manager at Robeco, are making more comprehensive moves. “We have neutralised our overweight to UK stocks by selling futures on the FTSE 100,” he says.
The UK stocks Glazener has selected for his portfolio are multinational companies, such as Shell and British American Tobacco, that will not be harmed by sterling weakness and have little exposure to the UK economy.
“We are staying clear of real estate companies and banks, which have a large exposure to the UK economy and would suffer from a weak sterling,” he says.
Financial companies are also most likely to be affected if the UK decides to leave the EU because they are major exporters of services. “In that case the UK will have to rearrange its trading relationships with the whole world anew. While the WTO sets international trade standards for goods, there are no such rules for services.”
The only UK financial owned by Glazener is HSBC, because this bank has most of its business in Asia and should be relatively unaffected by Brexit. But still, he recently reduced his weighting to the stock. “It looks cheap now but it is still a UK bank so one way or another, it would be impacted,” he says.
Alessandro Viviani, a fund analyst at Old Mutual Wealth in Milan, says his company has taken a strong underweight in both UK equities and fixed income due to Brexit concerns. “We maintain a defensive allocation with exposure of 5% to UK equity, compared to a benchmark weight of 8%, and an allocation of 4% to UK fixed income, versus 7% for the benchmark.”
Despite taking all these precautions, Viviani still believes Brexit is not likely to happen. “But if that changes, we will reduce our UK exposure further and we’ll hedge all our sterling exposure,” he says.
However, completely insulating yourself from Brexit is impossible, he admits. “I am sure the ensuing climate of uncertainty will be detrimental to financial markets. Even though our portfolios have a defensive allocation with a large exposure to European government bonds and treasuries, the impact of a Brexit will be negative for us, too,” he says.
A recent survey by NN Investment Partners among 91 institutional investors showed Brexit is perceived as a serious tail risk. Even though only a third of respondents deem it fairly or very likely to happen, Brexit is currently considered the most significant risk to their portfolios. An emerging market or eurozone crisis are both seen as a (slightly) lower threat. And Brexit would not only affect the UK negatively, but also the rest of Europe.
Sixty per cent of respondents to the poll believe Brexit will affect European financial markets negatively. Société Générale agrees, pointing out in its report that the euro area trade channels to the UK are twice as big as those to China. “Hence, a Brexit would matter more than a Chinese hard landing for the euro area,” it says.
“When it comes to quantifying the economic implications for the rest of Europe, there is no clear consensus, with estimates ranging from ‘very negative’ to even being ‘positive’. Our own view falls in the ‘very negative’ camp, with an estimated hit to GDP growth of 0.5-1% pa for the UK and 0.125-0.25% for the euro area over a decade,” Société Générale concludes grimly.
