Download brexit: european equities positioning

INFORMATION FOR INVESTMENT PROFESSIONALS
BREXIT: EUROPEAN
EQUITIES POSITIONING
EUROPEAN EQUITIES – JUNE 2016
Overview
Britain has voted on its European Union membership and has voted
to Leave. This we know, but what we do not know is the result of the
coming economic and political negotiations.
Over the next weeks and months, investors will be looking for clarity
over, among many other things:
Philip Dicken
Head of European Equities
 The new UK Prime Minister.
 Changes to the UK’s relationship with the EU.
 The EU’s response to the UK referendum, including possible
changes within the EU’s own governance.
 The rise of populist / anti-EU parties in Europe (Five Star in Italy,
Front National in France, Podemos in Spain etc).
Markets will respond to these challenges and to the changing
economic environment, movements in currencies and interest rate
expectations. But this uncertainty will also result in volatility and this
will give us, the active investors, real opportunities to add value. For
example, which sectors will benefit from the weaker pound? Which
companies benefit from a continuing low interest rate environment?
And which stocks get oversold in any turmoil?
So far in 2016 we have managed our portfolios in a relatively
defensive fashion. This has included a low exposure to banks,
especially in the Eurozone, and a bias to companies which can grow
in a low-growth world. This mainly bottom-up approach means that
we are in a position of strength and allows us to continue our focus
on long term alpha generation.
Below, we detail how specific European-facing equities funds will be
impacted by the referendum result.
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EUROPEAN EQUITIES | JUNE 2016
European Select Fund
The effect of the UK’s exit from the EU on European Select is reduced by the fact that the fund
invests in Europe excluding the UK, and therefore the direct Brexit impact on stocks within the
fund will be minimal. We have a few stocks where the UK part of the company is of major
importance – for example Kingspan, the Irish-quoted building materials company that
specialises in insulated panels. In the lead up to the vote Kingspan shares held up well despite
concerns over a potential exit, as the company’s product range is distinctive and this gives the
company competitive advantage.
Overall, the Select Fund is defensively-positioned, with a focus on consumer staples stocks and
other similarly steady, medium-term growth franchises.
Pan European Fund
The Fund is defensively positioned and, within the UK holdings, we are more exposed to
international earnings and companies with high dividend yields. We have no exposure to UK
banks, are very underweight financials, and are overweight pharmaceuticals and consumer
staples.
European Smaller Companies Fund
The effect of a UK exit on European Smaller Companies is reduced by the fact that the fund
invests in Europe excluding the UK and therefore the impact on stocks within the fund will be
minimal on a direct basis. We only have a few stocks where the UK part of the company is of
major importance, and the Fund is generally defensively positioned.
Pan-European Smaller Companies Fund
As per the European Smaller Companies Fund, this Fund has a bottom up, stock picking
approach targeting businesses with strong, resilient business models and higher than average
returns. As a Pan European fund, this Fund has UK exposure, but is in fact underweight the UK.
That said, a number of the domestic UK companies that we hold are likely to suffer from weaker
UK demand.
European Fund
The European Fund went into the referendum in a defensive position, overweight consumer
staples, pharmaceuticals and long duration concession assets. The UK is the second biggest
economy in the EU, so its demise from the union will have a significant effect on Europe and its
future. The fund does own companies with significant UK revenues e.g. Ferrovial (20%),
Kingspan (20%), Eurotunnel (roughly half) and Ryanair (27% of revenues) but all of these are
defensive and some, like Ryanair, typically thrive in a recessionary environment, as higher cost
competitors fall by the wayside. The fund’s beta is low and should do well in this environment.
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EUROPEAN EQUITIES | JUNE 2016
Pan-European Focus Fund
Again, we only have some stocks where the UK part of the company is of major importance.
Within our portfolio the stocks that will probably be most affected are the following:
 Ferrovial, which owns 25% of London Heathrow.
 BT Group, which is a mainly UK-focused business. The main reason we like the stock is not
necessarily the geographic argument, but more because of the synergistic and operational
benefits of taking over EE – ie of merging a landline with a mobile telecoms business.
 Ryanair.
 Compass – the defensive catering and support services company.
 UK insurance companies – we have holdings in Legal and General, Prudential and St
James’s Place (the latter is effectively a wealth manager).
We believe however that the greater risk is posed by companies which are sensitive to the UK
financial system (specifically the banks) and also exporters of products where there could be
restrictions on trade. We have little exposure to these types of business.
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