UK fund selectors baffle Europe with faith in Brexit

UK fund buyers more bullish on home market, Last Word research reveals

The majority (57%) of European fund selectors believe the UK will lose out after Brexit, but only one-third of UK fund buyers agree, according to Last Word Research.

However, almost half of UK investors (45%) believed that both sides would lose out compared with 29% of Europeans.

UK fund buyers were also more likely to give the two least unpopular answers – 15% think the EU will lose out from Brexit and 10% think that, in the end, no one will lose, the report said.

 

Source: Last Word Research

UK is the biggest loser

Italy-based K Capital Group portfolio manager, Matteo Lombardo, says he could not see how the UK could profit from leaving the EU as it would lose 26 markets.

Lombardo says there would be trade problems, especially those involving euros, and problems for active managers that had funds available across Europe and domiciled in the UK.

“If Brexit is going to happen in three months and the UK government still does not know what kind of deal they’re going to have honestly I see a very hard time for the UK after March this year,” he says.

“It’s not going to be beneficial for the EU either, but obviously the EU is going to be affected much less than the UK.”

EU has the most to lose

However, UK-based Investment Quorum chief investment officer Peter Lowman, believes the EU will be the biggest loser after Brexit.

“I think any bad outcome in Brexit is bad for the UK, but I think it could affect more parts of Europe more so,” he says.

For one, Lowman says the UK is less open to manufacturing shocks than some of the European nations like Germany.

“The EU and Europe as a whole has a lot of manufacturing companies and businesses. The UK does too but a lot less than three to five decades ago,” Lowman says.

Lowman thinks there is an additional concern and worry for Europeans outside Brexit as a result of trade tensions between the US and China.

Brexit not an issue

UK-based Thomas Miller Investment head of private client investment manager, Andrew Herberts, is more sanguine about Brexit as he believes in the long-term it will make little difference whether it is a soft or hard exit.

“Modelling on both sides, whether it’s the remain camp or the hard Brexit camp is always exaggerated to make a point,” Herberts says.

“I don’t think on an economic front Brexit is the answer to all our woes. The UK and Europe will remain as trading partners, and the UK is not going to free itself from that influence.”

Portfolio changes post-Brexit

Almost one-third of European fund selectors are looking to increase their European equity funds over the 12 months to December 2019 as a direct reaction to Brexit, the same report from Last Word Research revealed.

Another 46% said they looked to hold, 12% to decrease, and 11% did not use the asset class.

This is compared with UK fund selectors where none intended to increase their European equity allocations, while 35% planned to hold allocations , and 65% to decrease.

Both European and UK fund selectors on average are expecting to put more money into cash over the next year.

“This chimes with general doubt about what is going to happen next,” the research said.

Over a quarter of European fund selectors looked to increase cash, 54% to hold, 9% to decrease, and 10% did not use the asset class.

For UK selectors 30% looked to increase cash, 45% to hold, and 25% to decrease.

Over the next 12 months, Lombardo says he is looking to reduce half of his initial UK equity allocation and raise his European equity allocation by 15% to 20%.

Lowman says UK equities were attractive and if there was no political crisis or financial meltdown, the asset class could deliver a return by the end of the year.

Herberts is very positive on both European and UK equities on the basis that all developed economies grow without inflation worries, and without triggering a response from the central bank.

“If trade tensions ease a little, we’ll see  decent performance out of Europe. It’s a cheap market and earnings growth should come through if you’re not over paying,” he says.

“As long as we don’t see a recession I’m fairly positive on UK equities.”

Herberts says out of the 30% UK equities in his portfolio, 20% are currently in large caps and 10% are small and mid caps.

He says while he is not looking to change his allocations in the run up to Brexit, there could be an opportunity to increase his small and mid cap allocations depending on the outcome.

No returns in 2018

For the year to 31 December 2018 the average performance for both European equity and UK equity sectors were losses, according to FE Analytics.

Within both the Offshore Mutual and FCA Recognised universes, UK equities had a better year with falls of 10.9% and 12.1% respectively.

European equities were not far behind at a loss of 13.1% within the Offshore Mutual universe, and a decline of 13.4% within the FCA Recognised universe.

European equity sectors v UK equity sectors year to 31 December 2018

Source: FE Analytics

Post-Brexit projections

In the worst-case scenario, the UK’s GDP could lose up to 10.7% post-Brexit in an event of a no deal and if there was a zero net inflow of European economic area (EEA) workers, according to an economic analysis by the UK government.

For a no deal scenario without changes to migration arrangement, the UK could lose up to 9%.

UK GDP and GDP per capita impacts post-Brexit

Compared to today’s arrangements 
(%  change)
Modelled no dealModelled average FTA
No change to migration arrangementsGDP-7.7 (-9.0 to -6.3)-4.9 (-6.4 to -3.4)
GDP per capita-7.6 (-8.9 to -6.2)-4.9 (-6.4 to -3.4)
Zero net inflow of EEA workersGDP-9.3 (-10.7 to -8.0)-6.7 (-8.1 to -5.1)
GDP per capita-8.1 (-9.5 to -6.8)-5.4 (-6.9 to -3.9)
Central estimates and ranges in brackets
Source: UK Government

On the EU side, Ireland is projected to lose the most in the event of a no-deal at almost 4% of its GDP, according to the IMF. The Netherlands would be worse off after Ireland at a loss of just over 1%.

While every country’s GDP would also lose, it would be under 1%.

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