Looking for opportunities in the Brexit turmoil
Colin McQueen, Senior Fund Manager: Global Equities, Sanlam Four (UK)
In the article below, Colin McQueen, Senior Fund Manager: Global Equities, Sanlam Four (UK) discusses the impact of Brexit on direct economies and the bigger impacts on the political sphere, and how his firm has been looking for opportunities in the Brexit turmoil.
Given that markets have been rallying ahead in anticipation of a Stay vote, the surprise pro-Brexit announcement was clearly not what the markets had expected. Says Colin McQueen, Senior Fund Manager: Global Equities, Sanlam Four (UK), the impact on the immediate outlook will not be dissimilar to those outlined in the article we published earlier this week, titled “Brexit, what does it mean for the investors?”
- Impact on direct economics
The major impacts will be on trade flows and investment spending in the UK, particularly the latter, thanks to the resultant uncertainty. As the UK economy only represents 4% of world GDP, however, this is not expected to be a significant game changer.
- Bigger impacts on the political sphere
Here we are largely entering the realm of the unknown. We have already seen the resignation of David Cameron and the first calls for a renewed Scottish referendum. This turmoil is likely to complicate the difficult task of realigning the UK’s trading relations with the EU and the rest of the world. There is also significant uncertainty over the political fall-out across the rest of Europe. As many as 11 other European countries also have notable anti-EU parties, calls for other referendums may spread. The EU authorities will be caught between the desire to ease the economic impact of UK exit and not making it look like too attractive a proposition for other EU members. We would expect to see intervention from central banks to try to steady market nerves, however, we cannot know with certainty how this will pan out in the near term.
Markets obviously loathe the uncertainty that this causes and we are seeing an inevitable reaction of a sell-off in ‘risk assets’ generally.
The impact across our global portfolios varies across the two strategies we run:
a) For the Sanlam FOUR Stable Global Equity Fund (which have a quality overlay to our value process): The fund is falling in absolute terms (in US$), but by much less than wider markets. This is a reflection of the fund’s strategy of owning cash-only generative non-cyclical stocks. These, by definition, are less sensitive to the economic environment. The fund has around 10% of its assets in UK listed stocks, which are entirely in multi-national companies with comparatively little UK exposure. The fund is more heavily skewed to US listed stocks primarily, as we have found much better valuations amongst US healthcare and technology companies.
b) For the Sanlam FOUR Global Equity Fund (value-orientated strategy), where we hold both a mixture of non-cyclical and cyclical companies, we are seeing a bigger impact on the portfolio following the Brexit announcement. The fund has around a 7% exposure to UK-listed stocks, and again these are more heavily skewed to multi-national stocks (with the exception of Barclays). The fund is seeing a wider impact on cyclical holdings outside of the UK. Given widespread valuations in markets, a lot bad news has already been priced in for other cyclical companies, but the heightened level of uncertainty is likely to continue.
We remain calm, and continue to look for opportunities to pick up assets that may have been oversold amid the carnage in the markets. The most straightforward options we are looking at are multi-national companies and exporters in Europe and the UK, which have been taken down by index selling. Prices of all stocks are proving highly volatile at present, however. We suspect domestic European cyclical stocks may stay under a cloud for a little longer, and are likely to remain volatile over the coming months.
