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Referendum Result - views from our fund managers

24 June 2016

The EU referendum result is likely to have a significant effect on markets. Our Fund Managers share their views on what this could be.

Charlie Thomas

Charlie Thomas, Head of Strategy, Environment & Sustainability

The vote in favour of ‘Brexit’ will almost certainly be a source of prolonged uncertainty including regarding the direction of UK government policy towards the environment. The effect on funding could also be significant – for example last year the European Investment Bank contributed over €7 billion in funding for the UK renewable energy industry, particularly offshore wind.

Despite these concerns, there has been significant appetite from private sector institutional investors to potentially fill any funding gap, however it remains to be seen whether this will be affected by policy uncertainty following the referendum result. Moreover, tackling issues such as climate change are truly global goals, not just European goals.

Cédric de Fonclare

Cédric de Fonclare, Head of Strategy, European Opportunities

The United Kingdom’s decision to leave the European Union places the country in uncharted waters. It is clear that we have a long period of uncertainty ahead of us, as negotiations relating to the process of leaving take place. Markets rarely like uncertainty, and it seems reasonable to expect that sterling will remain weak for some time.

After an initial market shock there could well be a normalisation over time, as we eventually saw after the Swiss National Bank dropped its currency peg to the euro in 2015. We also anticipate euro currency volatility, given that the outcome of the referendum will not be good news for the Eurozone economy or political process. Our investment focus, however, remains on picking individual companies that we believe can outgrow the broader economy under a variety of different economic conditions. This process has served us well for over a decade and we believe it can continue to do so in the future.

Stephen Mitchell

Stephen Mitchell, Head of Strategy, Global

The referendum decision to exit the European Union has seen the pound fall further against a basket of global currencies, a move that had already begun prior to the vote as polls indicated the “Leave” campaign might win. When it comes to corporate earnings and shareholder returns, ‘Brexit’ is now likely to result in a prolonged period of uncertainty and pain-staking assessment by the market to better ascertain the likely implications for specific companies. The environment may be especially challenging for banks and insurance companies.

JCR

John Chatfeild-Roberts, Head of Strategy, Independent Funds

The British public have spoken and, despite the polls being close for several weeks, this referendum result will have caught politicians and central banks in the UK and abroad ‘on the hop’. There are many moving parts to the global investment landscape to consider and ‘Brexit’ is just one of them.

Even though there have been falls in stock markets, it is important to remember that weakness in the pound is good news for many UK companies, particularly exporters who gain an immediate price advantage against their overseas competitors. Furthermore, that weakness in the pound gives an immediate increase in the sterling value of overseas investments.

It is important to stress that, despite the current uncertainty about the future, the UK will remain a member of the European Union for at least the next two years while the details of life outside the union are negotiated. We believe the UK economy is still robust and there are opportunities from ‘Brexit’ as well as risks, as indeed was the case when the UK was ejected from the Exchange Rate Mechanism and when we opted not to join the Eurozone during the 1990s. 

Steve Davies

Steve Davies, Head of Strategy, UK Growth

The UK domestic economy has held up surprisingly well in the run up to the referendum, aided by the fact that disposable incomes are still rising by some 7% year-on-year (according to ASDA’s income tracker). The uncertainty of ‘Brexit’ poses some threat to this: companies are less likely to invest in the UK during the negotiation process and there is also likely to be a hit to consumer confidence, while a weaker pound may lead to higher inflation. One offsetting factor may come if the Bank of England chooses to reduce interest rates from here or introduce a further round of stimulus in an attempt to boost the economy.

One final thought: a falling pound combined with a hit to the share prices of UK domestic assets is likely to reignite merger and acquisition interest in UK companies from overseas and I would expect the Chinese to be right at the front of that queue.

Rhys Alastair

Alastair Gunn, Fund Manager, UK Value and Rhys Petheram, Fund Manager, Fixed Interest & Multi-Asset

Markets hate uncertainty, but there will most likely be plenty in the months ahead. However, we expect that investors prioritising lower risk investments and fears of a recession assuaged by prolonged low interest rates and economic stimulus to be positive for UK government bonds.

We think the market’s knee-jerk reaction (particularly as it relates to the shares of domestic UK companies) could be followed by some sharp snap backs later in the year as life, having no alternative, goes on. Away from the domestic arena, companies with significant overseas earnings are likely in our view to report higher profits due to a weaker pound. In the medium term, we expect greater volatility will arise from the uncertainty about the shape of future trade relations, but there will be opportunities too.

Important Information
This commentary is for informational purposes only and is not investment advice. The views expressed are those of the author at the time of writing and are not necessarily those of Jupiter as a whole and may change in the future. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested.
Issued by Jupiter Asset Management Limited which is authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of Jupiter Asset Management Limited.

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