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Brexit reaction: Global Equity Income view

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Short term impact: currency volatility, growth moderation, continued demand for income generating assets of all types.

The decision of the UK electorate to leave the European Union is unexpected, and has resulted in significant market volatility. In the short term there is little practical impact from the decision at a company level. The UK will, at some point, begin to negotiate with other countries but in the meantime business continues as normal across Europe. The biggest short-term impact on business is likely to be the effect of currency movements. Currency weakness will improve the competitiveness of UK exports, and the earnings of overseas earners will be revised upwards. On the negative side input cost increases will affect some industries. The best opportunities for investors may come from international businesses listed in the UK and Europe that are sold off with the market, but whose trading will not be impacted by the decision and who may benefit from currency weakness. A significant proportion of the team’s Global Equity Income portfolios are invested in these types of company. There may be short term volatility in these share prices but we expect them to recover. 

Medium to long-term impact: lower rates expectations for UK, Europe and perhaps the US. Focus on balance-sheet strength and cash flow in stock selection.

The medium to long term impact of the decision is very hard to predict. We do not see global economic growth as being particularly impacted by events in the United Kingdom, but one implication of the referendum outlook is that growth in the UK could slow in the medium term until any new terms of trade are finalised and foreign direct investment is put on hold. This could subdue interest rate expectations, and at extremes could lead to further monetary easing in both the UK and Europe. This is likely to result in continued demand for companies with defensive revenues that generate attractive sustainable dividends and in which the portfolios have significant investments, such as telecommunications, consumer staples and utilities. The biggest risk is that the slowdown could be prolonged and greater than expected, and cyclical stocks would be impacted by this, particularly those with weak balance sheets. We are alive to this risk, but take some comfort that our stock selection is driven by dividend sustainability and prioritises strong cash flow generation, and balance sheets. The Global Equity Income team had not taken a speculative view on the outcome of the referendum, therefore, we have not had to take any action in the portfolios as a result of the outcome. Based on the views above we may consider increasing European companies with global earnings, and reducing financial services exposure depending on how stock prices move. 

For professional investors only. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. The information in this article does not qualify as an investment recommendation.

Issued in the UK by Henderson Global Investors. Henderson Global Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Fund Management Limited (reg. no. 2607112), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services.

Mark Battersby

Mark Battersby is head of content research and development at Last Word. Mark joined Last Word in February 2012, having previously worked at Citywire, Interactive Investor International, and FT Business.

Part of the Bonhill Group.