Three of Henderson’s European equities fund managers give their views on the implications of the UK potentially leaving the European Union. The Henderson European equities team share resource and ideas but are free to implement their views within their individual portfolios as they see fit.
The Brexit debate has and will dominate the headlines, but no-one really knows what will happen. I have a personal view and that is that Britain will vote to stay. However I would not position for a binary outcome and my portfolios have not been restructured in expectation of a ‘yes’ or a ‘no’ vote.
Hypothetically, if Britain decides to leave and this leads to panic that weakens sterling, this would be reflationary for the UK economy. This would be helpful in a world that is threatened by deflation. In this situation we would turn our attention to the potential beneficiaries of that currency weakness. For example, I would expect some immediate stock-specific opportunities within UK exporters.
Having said that, this is a pure speculation at this stage and as noted, I will not be repositioning my portfolios at this point.
Brexit is just one of a list of market worries that includes the refugee crisis, Spanish politics and China. In my opinion, however, it seems likely that these concerns have already largely been priced into markets. The areas we think are most important on a wider basis are the strength of the US economy, the dollar and the potential for Chinese currency devaluation. If the US economy avoids recession, which the latest manufacturing data suggests it will, and the Chinese do not devalue the yuan, then, in my view, European equities can still make progress, regardless of the uncertainty around the Brexit referendum.
While polls on the EU referendum suggest that the UK will stay, the increased stress over migrants and economies could make for a nervous time. It may seem odd to those not living in the UK, but there is widespread support for an exit among Conservative politicians, many of whom would prefer that the UK jumped into a time machine and went back 150 years. The “outs” maintain that a short transition will ensue, before the UK economy returns to sunnier climes.
In my view, claims that an EU exit will not have negative consequences for the UK economy are naïve. Whichever view prevails, uncertainty caused by the vote may hinder any signs of real progress for markets for the time being. We are likely to remain quite underweight the UK relative to the index until the situation is resolved.
Reflationary: stimulative to the UK economy.
Deflation: a fall in the price of goods and services, indicating that economic conditions are deteriorating, which can have negative consequences for employment and wages, among other factors.
Priced into markets: suggesting that share prices may have already moved in anticipation of any news or market event. For example, the stock market may trade lower in anticipation of a change in interest rates.
Underweight: having less exposure to the UK market than the benchmark index (in this case, the FTSE World Europe Index).