Brexit – Initial Reactions From Jupiter Asset Management
21 July 2016
The UK’s decision to leave the European Unionplaces the country in uncharted waters. It is clear that we have a long period of uncertainty ahead of us, as negotiations relating to the process of leaving take place. Markets rarely like uncertainty, and it seems reasonable to expect that sterling will remain weak for some time.
Cédric de Fonclare
Jupiter Special Situations Fund
After an initial market shock there could well be a normalisation over time, as we eventually saw after the Swiss National Bank dropped its currency peg to the euro in 2015. We also anticipate euro currency volatility, given that the outcome of the referendum will not be good news for the Eurozone economy or political process. Our investment focus, however, remains on picking individual companies that we believe can outgrow the broader economy under a variety of different economic conditions. This process has served us well for over a decade and we believe it can continue to do so in the future.
Jupiter Global Managed Fund
The decision to exit the EU has seen the pound fall further against a basket of global currencies, a move that begun as polls indicated the “Leave” campaign might win. We believe this could have a positive impact on the portfolio, which has around 88% of its assets in non-Sterling currencies. The majority of the UK holdings in our portfolio are international businesses and exporters that should benefit from a weaker pound. When it comes to corporate earnings and shareholder returns, ‘Brexit’ is likely to result in a prolonged period of uncertainty and re-assessment by the market to ascertain the likely implications for specific companies. The environment may be especially challenging for banks and insurance companies. The long term impacts on our portfolio should be fairly limited given the global operations of the businesses in which we invest.
‘Brexit’ will almost certainly be a source of prolonged uncertainty including regarding the direction of UK government policy towards the environment.
Jupiter Ecology Fund
The effect on funding could also be significant – for example last year the European Investment Bank contributed over €7 billion in funding for the UK renewable energy industry, particularly offshore wind.
However, there has been significant appetite from private sector institutional investors to potentially fill any funding gap, although it remains to be seen whether this will be affected by policy uncertainty. Moreover, tackling issues such as climate change are truly global goals, not just European goals. UK companies may be volatile and we will look to add to our investment in UK-based world leaders with global markets – for example in areas such as automotive pollution control – should there be any significant share price weakness.
Jupiter Merlin Portfolio
The British public have spoken and, despite the polls being close for several weeks, this referendum result will have caught politicians and central banks in the UK and abroad ‘on the hop’. As portfolio managers we always take many factors into account when selecting investments; there are many moving parts to the global investment landscape and ‘Brexit’ is just one of them.
‘caught politicians and central banks in the UK and abroad ‘on the hop’’
The managers of the funds held in our portfolios have a general tilt towards higher quality companies with robust balance sheets, which we believe should be well-suited to weathering any immediate storm. Even though there have been falls in stock markets, it is important to remember that weakness in the pound is good news for many UK companies, particularly exporters who gain an immediate price advantage against their overseas competitors. Furthermore, that weakness in the pound gives an immediate increase in the sterling value of overseas investments.
Despite the current uncertainty, the UK will remain a member of the European Union for at least the next two years while the details of life outside the union are negotiated. We believe the UK economy is still robust and there are opportunities from ‘Brexit’ as well as risks, as indeed was the case when the UK was ejected from the Exchange Rate Mechanism and when we opted not to join the Eurozone during the 1990s. As the situation unfolds we will continue to act in our investors’ best interests, taking a long-term approach and making use of the advantages and flexibility that having a global, multi-asset mandate can bring.
Jupiter UK Growth Fund
As of the morning of the referendum the Jupiter UK Growth Fund holds around $115m in cash (note that this is held in US dollars) and also had 9% of its assets in four companies listed in the US and Germany to provide some mitigation against a fall in the pound.
The UK economy has held up surprisingly well in the run up to the referendum, aided by the fact that disposable incomes are still rising by some 7% year-on-year (according to ASDA’s income tracker). The uncertainty of ‘Brexit’ poses some threat to this: companies are less likely to invest in the UK during the negotiation process and there is also likely to be a hit to consumer confidence, while a weaker pound may lead to higher inflation. One offsetting factor may come if the Bank of England chooses to reduce interest rates from here or introduce a further round of stimulus in an attempt to boost the economy.
The Jupiter UK Growth Fund’s holdings in UK banks still look good value by global standards in my view, but they will certainly take a hit if the UK economy turns down from here. With that in mind I will see how the dust settles over the next few days before deciding whether to reduce the fund’s weightings in the worst affected areas and reallocate towards shares with more global businesses.
One final thought: a falling pound combined with a hit to the share prices of UK domestic assets is likely to reignite merger and acquisition interest in UK companies from overseas and I would expect the Chinese to be right at the front of that queue.
Jupiter UK Special Situations Fund and Jupiter Income Trust
The share prices of many UK domestic companies, which had rallied strongly at the start of the week as polls suggested a move toward ‘Remain’, fell sharply once the victory for ‘Leave’ was confirmed. The funds I manage have exposure to banks, construction and retail among the more domestically-orientated sectors in the market. These stocks were already sitting at low valuations that reflected the uncertainty. The significant uncertainty that the UK now faces means that I expect investors will shun such areas for a significant period.
The Jupiter Income Trust and Jupiter UK Special Situations Fund both have c.81% invested in UK shares with the remaining 19% split between cash, US and European shares which should provide some offset to falls in UK equities.
Jupiter European Fund
Today it is especially important to remember that this strategy is not about Europe, it is about European expertise. Over the many years I’ve been running this strategy I have seen various crises come and go; it’s never changed the consistency of what we’re trying to do, which is invest in companies that can compete and succeed on the world stage. What makes those companies special is that I believe they can flourish in different economic scenarios. We have not adjusted the portfolio at all because of the referendum and don’t anticipate doing so now that the result is known – that would have been the case whatever the outcome.
Alastair Gunn & Rhys Petheram, Jupiter Enhanced Distribution Fund and the Jupiter High Income Fund
Markets hate uncertainty, and we expect that investors prioritising lower risk investments and fears of a recession assuaged by prolonged low interest rates and economic stimulus to be positive for UK government bonds.
We have been positioned defensively in sterling corporate bonds with few bank bonds and peripheral eurozone government bonds, which the fragility of the eurozone make susceptible to political contagion, which is a bigger risk in our view.
We think the market’s knee-jerk reaction, particularly in UK companies, could be followed by some sharp snap backs later in the year as life goes on. Companies with significant overseas earnings are likely to report higher profits due to a weaker pound. In the medium term, we expect greater volatility but there will be opportunities too.
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