Managers ponder defensive plays post-Brexit
The value of FX exposures comes to the fore .
US healthcare and telecomms valued for safety.
More market volatility expected.
Rising risk premia create opportunities for long-term investors.
Featuring this month’s experts:
findaWEALTHMANAGER.com is a gateway to the UK’s leading wealth managers and we regularly tap their expertise for the benefit of our users.
Looking ahead to July, the expert investment views include how the Brexit fallout dominates the investment agenda – but it’s not all doom and gloom, they confirm that opportunities do exist.
Adjusting to LPB (Life Post-Brexit)
Richard Champion, Deputy Chief Investment Officer at Canaccord Genuity Wealth Management says:
In an extraordinary show of contempt for establishment opinion, the people of Britain have thumbed their noses at the collective entreaties and wisdom of almost the entire developed world and voted to leave the European Union.
But where has Brexit left investment markets?
The initial knee jerk reaction has been to hammer the prices of companies exposed to the UK economy: house builders, UK clearing banks and airlines all fell by around 20% on Friday 24. Domestic media companies also fell sharply, as did financial companies, property stocks and consumer-related plays. That this has not been much reflected in the wider Index, which at the time of writing was only down about 3.5%, implies a scramble to switch into perceived safe havens. Consumer staples and other defensive sectors, such as tobacco, exporters, healthcare and utilities, have all held their own or even risen in value.
Elsewhere in Europe, equity markets fell more steeply than the UK, as investors fretted about the future of the EU itself. From a market perspective, the “Leave” vote was the worst possible outcome and David Cameron’s resignation has only exacerbated the situation.
With volatility does of course come opportunity: Sports Direct may not be everyone’s idea of high-quality corporate governance, but the shares today trade on a forward price earnings multiple of around 8x – a huge discount to the UK market. In broadcasting, ITV was one of the first companies to suffer from Brexit fears and, at the time of writing, was down 35% since the beginning of the year, despite strong cash flow and moves to diversify its revenue base away from both the UK and advertising. These companies certainly have challenges from Brexit, but our sense is that the price falls we have seen are overdone.
The next few weeks and months are likely to be characterised by uncertainty as the process we use to extricate ourselves from the EU becomes clearer. The old Chinese proverb prays that, “We do not live in interesting times”. And boy, are we in those.
Deputy Chief Investment Officer at Canaccord Genuity Wealth Management
Watching, waiting for the opportunities
Alex Scott, Deputy Chief Investment Officer at Seven Investment Management, says:
Markets experienced brief turmoil as they attempted to price in the immediate impacts and longer-term risks of the surprise Brexit vote. European and domestic UK shares fell sharply, as did the pound: of course, the weak Sterling highlights the benefits of international diversification given assets denominated in overseas currencies are worth more. The globally-diversified FTSE 100 has rallied off its lows as investors recognise the value of foreign currency (FX) exposures. Investors need to continue to manage and adjust FX exposures carefully.
The political fall-out has been significant. In just under a week, we have seen the resignation of the Prime Minister, the departure of over half the Shadow Cabinet, downgrades in the UK sovereign credit ratings and the motion of no confidence in the Labour leader, which are all deeply disturbing to investors at home and abroad.
We expect more volatility as the timeline to trigger Article 50 is challenged and as leadership contests rage. During this period, we believe that there will be further ebbs and flows, as markets react to the shifting probabilities of the various scenarios: full, partial or a delayed Brexit…or perhaps even no Brexit?
Meanwhile, our historically high cash holding (circa 9% using the AAP Balanced fund as an example) gives us options to look at opportunities where we believe that they have become oversold based on the fundamentals, which we believe remains the basis for valuations in the long run.
Deputy Chief Investment Officer at Seven Investment Management
Look stateside for defensive plays
Patrick Armstrong, Chief Investment Officer at Plurimi Wealth, says:
Brexit has raised the downside risks for risk assets in the near term. We believe a more defensive positioning will be rewarded unless there is a very strong global policy response.
The “Leave” vote will result in in trade drags for both the UK and the euro area. The vote will create further delays in consumption and investment decisions in the UK and Europe. We believe there is now a 50% chance the UK economy falls into recession in the second half of the year based on the uncertainty and inevitable hit to consumer confidence. This raises downside risks for the European equity markets and warrants reducing net exposure, and titling exposure towards defensive dividend-paying companies.
With the uncertainty created following Brexit, we now believe the US Fed is on hold this year, and defensive interest rate-sensitive stocks in the US are now attractive given the lower-yield environment. We have been adding to US healthcare and US telecom companies, based on their attractive yield and insulation form the likely European economic downturn. These defensive plays are relatively inexpensive and will benefit from economic uncertainty resulting from Brexit.
In terms of currencies, we expect the US dollar to appreciate based on safe haven flows, but we would recommend against positioning with long Japanese yen as a policy response from the Bank of Japan is highly possible.
Chief Investment Officer at Plurimi Wealth
Brace for more Brexit volatility
Richard Carter, Fixed Interest Specialist at Quilter Cheviot, says:
These are very early days post the referendum vote in favour of leaving the EU. In our opinion, now is not the time to make material financial decisions – what is important is to retain flexibility and to seek expert, informed advice.
Financial markets will remain volatile for the foreseeable future. At the time of writing, the FTSE 100 index is holding up well, but domestic-oriented stocks and the pound have fallen sharply. Investors will continue to seek safe-haven investments until the dust settles, with UK 10-year gilts trading at all-time lows. Index-linked gilts are also performing well, helped by the belief that the lower level of sterling will result in higher UK inflation.
Other perceived safe-haven instruments include gold which, at the time of writing, has broken through the psychologically important US$ 1,300 per ounce level. Not surprisingly, European stock markets are down on the news although the reaction in the US has been more benign.
There are two clear areas which, in our view, are likely to be the most negatively impacted in the UK equity market. First is the banking sector, which will be negatively affected by falling bond yields and potentially lower interest rates. Second are medium and smaller companies whose earnings are particularly tied to the fortunes of the UK economy.
By contrast, overseas earners, typically UK large companies, should benefit from the lower level of the pound.
Fixed Interest Specialist at Quilter Cheviot
Think both long and short term
Kieron Launder, Head of Investment Strategy at Cazenove Capital, says:
After the result from the UK’s EU referendum we now have certainty of uncertainty – uncertainty on all fronts (financial, economic and political) and as a result, markets are likely to remain volatile even after sizeable initial reactions. The uncertainty is naturally greatest in the UK and Europe, where the longer-term economic and political relationship will take years to resolve.
For the most part, financial markets are reacting as we expected in light of the referendum result, with significant initial moves being seen – risk assets selling off and defensive assets such as US treasuries, gold and safe-haven currencies performing well. To some degree, these moves will have been amplified by the fact that recent more positive “Remain” polls led to risk assets and sterling performing well over the last few days, although as we watch the markets there have been some big moves back already reducing some falls. For example, global equity markets are off about 5% as we speak, with the UK down about 1% helped by the weaker sterling, Europe about 6% and US down 2%. Sterling (vs. USD) is down almost 10%
Having added some defensive positions (for example, reducing equity risk, buying US TIPS and adding to gold) over recent months we will be watching the markets closely for opportunities that come out of volatility, potentially taking profits on those defensive assets that have performed well and reinvesting in areas that have been marked down.
Some of the areas that we would be looking to invest, subject to market levels and valuations, would be UK large-cap equities, which have significant overseas earnings (that will benefit from a weaker sterling), US equities and UK index-linked gilts, taking care to take relative moves into account. Other equity markets may also have had their attractiveness altered based off significant currency and market moves.
It might take time for the dust to settle and for financial markets to find new shorter-term levels. In some markets, such as fixed income, we are seeing significant bid-offer spreads, which is understandable given the levels of uncertainty. This does mean we have to be much more careful with regard to decision-making and implementation. Particularly as more liquid markets such as currency and equity markets have been exhibiting larger moves making the timing of dealing more crucial.
Markets, and many investors, dislike uncertainty and as such risk premiums will have increased, as has volatility within markets. However, this will undoubtedly lead to opportunities for longer-term investors.
Head of Investment Strategy at Cazenove Capital
Think both long and short term
Lee Goggin, Co-Founder of findaWEALTHMANAGER.com, says:
In our June Investment Tips I mused about whether England’s successful progress through the Euro 2016 football competition might have some impact on the way we voted. I had assumed that if we were doing well on the field then perhaps we might be better disposed to our Continental cousins and feel incumbent to stay within the EU, such is the euphoria that a large section of the voting public feel towards the game.
How wrong could I have been! With the benefit of hindsight, I can only say that given our performance against Iceland, that had the vote been the day after, the margin of success for the Brexiters would have been even greater.
I do know of course that you can’t equate politics and sport. What I also know is that the next few months – and possibly years – are going to be volatile vis-à-vis our finances, politics and socioeconomic issues.
Do safe haven assets like gold have a place in our portfolios? If so, how much and in what form should it take? Should we be ditching UK stocks and buying the US dollar? Questions abound for investors.
It’s a confusing time, but out of adversity comes opportunity and having a decent wealth manager looking out for them and watching your back in times like these is invaluable. If you have a wealth manager and you’re not happy, then get a new one. If you don’t have a professional advisor and think you might need some help, then get one. Whatever you do, make sure your money gets the help it needs in these very unusual times.
Co-Founder of findaWEALTHMANAGER.com
The investment strategy explanations contained in this piece are for informational purposes only, represent the views of individual institutions, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.