Europe’s political and economic make-up could be radically altered after 23 June if the UK votes to leave the European Union (EU). The EU would lose its second largest economy, at a time when growth is already moving at a glacial pace, and the lack of clarity over new trade agreements and foreign direct investment (FDI) could see a prolonged period of uncertainty.
In its latest Active Viewpoint, Martin Currie, the specialist active equity manager, considers whether ‘Brexit’ will be the seismic event many predict, or just prove to be a hump in the road.
The UK’s vote on EU membership will be historic and the result could dramatically change not just the political landscape of a continent, but the environment in which European companies operate. In the lead up to the referendum, polls have suggested voters will opt to ‘remain’, but the result is too close to call. This lack of certainty has led to higher market volatility, both in sterling and in equities, as polling day approaches. It seems probable that staying in will be a non-event in terms of its impact on markets, barring any future referendum campaigns. But it is equally probable that withdrawing will lead to a period of instability.
Michael Browne, Portfolio Manager, European Long/Short at Martin Currie comments:-
“Whatever the outcome, from an investment perspective it is important to be flexible and pragmatic. Thus a long/short strategy is invaluable. In the more negative scenarios, we would aim to protect capital by reducing the balance sheet and increasing our short exposure. Against a more positive market response we could extend the balance sheet into a rising market. Also, as a pan-European strategy, we have the flexibility to focus on those countries and companies which are either less exposed to the impact of Brexit, or will benefit from it.”
Martin Currie’s European Long/Short stockpicking process is based on a deep, fundamental analysis of individual companies, but the team also considers macro factors qualitatively (via its ‘traffic light’ system) and quantitatively (using its macro matrix). The team’s credit indicators will react immediately to the Brexit outcome and, sticking to their process, they would review their net and gross exposures and react to any risk or opportunities that they find.
Steve Frost, Portfolio Manager, European Long/Short at Martin Currie continues:-
“From a portfolio point of view, we do have long exposure to some of the sectors which are more prone to an impact from Brexit. These include several financial names, including a UK bank and a number of chemical companies*. For us, holding these stocks, is based first and foremost, on our positive view of their fundamentals rather than a pre-emptive decision, either way, on the outcome of the referendum. However, we believe that any potentially negative exposure to Brexit should be mitigated within the portfolio, not only by the balance of holdings across regions and sectors, but also through our short positions.”
The objective of Martin Currie’s European Long/Short team remains to efficiently capture uncorrelated equity returns with managed volatility and downside protection. In this sense, the Portfolio Managers will aim to look through the current short-term market noise and benefit from the opportunities, whatever UK voters decide.