Discussing Brexit in the heart of Europe

As the Brexit referendum is getting closer, the four speakers of the first InvestmentEurope’s fund selector roundtable in Europe’s capital Brussels gave their views on the topic at the occasion of a panel discussion.

T.Rowe Price’s fixed income specialist Stephen Marsh said statistics of bookmakers on Brexit were worth considering compared to Brexit polls.

He argued pollsters got wrong with the outcomes of Britain’s Prime Minister David Cameron’s election and of the Scottish independence referendum while bookies were right.

The probability of Britain staying in the EU is very high, Marsh assessed when looking at surveys and bookies’ odds. As a British citizen, Marsh said he will vote to stay in the EU.

He underlined a Brexit will certainly have a “distinct impact on the market”, adding that T.Rowe Price has shorted euro and sterling since the start of the year.

“We have options in our absolute fixed income strategy that allow us to make money if a Brexit occurs.

“We have been looking at individual issuers. Barclays and HSBC for example. How much their activities would be impacted by a Brexit?” Marsh said, explaining that the allocation to some individual UK businesses has been reduced.

Investec’s European regional analyst Rajeev Bahl, considered the “economic pragmatism of a Brexit”.

“How large the UK would be as a trading partner in post-Brexit? It would be the single largest export market worldwide with 60% of exports versus 50% in the US and 6% for China,” he said.

Given the size of that export-import’s relationship, Bahl believes that sort of relationship will normalise quite quickly in the event of a Brexit.

A move in Investec’s European equities portfolio has been to avoid taking risk where the firm was not paid to take it.

Bahl still believes there are many valued investments in the UK, well-run companies with improving profitability and good valuations.

“We are not zero weight but we have been thinking more closely about cross border trades flows,” he said, recommending a bottom-up approach to UK businesses.

Steven Smith, investment specialist at Capital Group, said that if managing a diversified global portfolio, Brexit would hit its top 4 concerns alongside China’s slowdown, another drop in commodity prices and US politics.

“The UK has got a big current account deficit growing. It is about 6%. What happens to the current account deficit post- Brexit?” Smith asked.

Smith argued that on a short-term basis, a Brexit could be either “very messy” or “very clean”.

“If it is a clean Brexit, the UK will quickly sign trade agreements with the EU,” he said but he believes a Brexit occurring is far less likely than likely to happen.

Smith sees the banking industry as the sector that would suffer the most from a messy Brexit, both in the UK and in the EU.

A recession might also take place in the UK on the short term, Smith said.

According to Alexander Uhlmann, director of portfolio management within the Invesco’s quantitative equities strategies team, any potential impact of a Brexit is over-estimated, in particular regarding equity markets’ returns.

“The emphasis on the Brexit is a bit too much in terms of what the impact is likely to be. The impact on equity markets is less strong than what people would exepect. Being a European citizen, I would like the UK to stay in,” Uhlmann said.

Uhlmann added that looking at the UK equity market, the FTSE 100 was not representing the UK and was rather a “global” index including emerging markets.

Smith emphasised that only one fourth of the revenue generated by the FTSE 100 comes from the UK.

Looking at the options market, Marsh said volatility is already priced in and that opportunities to get long in the credit market remain.

Another topic brought to Brussels roundtable’s speakers has been the Fed rate hikes.

Smith questioned the nature of Fed rising its rates.

“It depends on why the Fed is rising rates. Are they because of inflation concerns? I don’t think so. If you look at the US’ core inflation, it is trending down since 2012 and it is below the Fed’s 2% target.

“The Fed doesn’t need to raise rates aggressively from an inflation point of view.

“We even estimate that even a 100bps rise could tip the US economy into another recession. That is how fragile the economic recovery in the US is,” Smith said, recalling that in Q1 2016, the US recorded the worst macro figures since a couple of years.

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