UK-based asset manager Aviva Investors believes a Brexit vote would have an even greater effect on exports. “We would expect to see a permanent reduction in exports to the EU, reducing national income by 3%, rising to as much as 10% in a worst-case scenario. Foreign-direct investment into the UK would also suffer, leading to higher unemployment and a decline in the country’s long-term growth potential,” it said, adding that a leave vote could push the UK into recession as early as by the end of this year.
Brexit would also lead to a further slide in sterling, according to the same note: “Financial markets would undoubtedly react badly to a vote in favour of Brexit, too. We would expect an immediate and sharp fall in the pound. While the Bank of England would no doubt ease policy in response to any economic downturn, it seems unlikely this would prevent UK share prices from falling sharply.”
Others, however, have a much more sanguine view of the possible consequences of Brexit. Woodford Investment Management, having commissioned an independent study of the outcomes by consultancy Capital Economics, believes that sterling weakness is likely to be the only serious issue.
“There will be short-term stress in some markets and the currency will come under pressure, but we do not think it will fundamentally affect the UK economy,” said WIM head of investment Neil Woodford at a recent panel discussion.
James Hanbury, manager of the Odey Allegra Developed Markets Fund at Odey Asset Management, agreed and said at the same event that he believes, in the long term, a vote to leave will have a “de minimis” impact on the UK economy and could arguably even be beneficial. “The FTSE 100 will do quite well because most of those companies are international and the translational effects will be high [because of sterling weakness], though the FTSE 250 will get hit in the short term.”
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 (pictured left), 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 won’t be harmed by sterling weakness and have little exposure to the UK economy, he says.
“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, as this bank has most of its business in Asia making it less exposed to Brexit. But still, he recently reduced his weighting to the stock. “It looks cheap now, but it’s still a UK bank so one way or another, it would be impacted,” he says.
