The UK is heading to the polls today to vote in the EU referendum.
With voting now underway in the EU referendum and the last set of polls sending mixed signals, the result is too close to call. Most financial institutions have assumed Remain as their base case outcome, so a victory for the Leave campaign could see big swings in the markets tomorrow.
While ‘Brexit’ is without doubt the issue that is front of mind for investors, there are a number of other factors in the background dogging markets. These include renewed fears around the Chinese economy after recent data has shown a slowdown in private investment in China in May, which suggests low confidence and may indicate that China’s last round of stimulus has proved short-lived.
Whatever the outcome of the EU referendum, politics will continue to loom large over the markets. Spain holds its second General Election in six months this Sunday and a strong showing from the anti-austerity Podemos movement could unnerve the markets. Populist and anti-establishment political movements are on the rise across the globe, from maverick Presidential candidate Donald Trump in the US to Marine Le Pen in France and the Five Star Movement in Italy, which this week secured major gains in local elections, winning control of Rome and Turin.
Caution in uncertain times
In these uncertain times (including ‘Brexit’, concerns about China, the question of when the US might raise interest rates again and the theatre of the US Presidential elections), continued turbulence in financial markets can be expected. Our investment team continues to position portfolios cautiously, as they have done long before the EU referendum campaign, with overweight exposure to absolute return funds and cash and, within UK equities, a preference for funds focused on larger company shares.
There is clearly a lot of anxiety currently factored into the equity markets, which could either turn into a knee jerk sell-off or unwind into a relief rally in the aftermath of the vote. There are risks at this stage for investors taking evasive action either now or immediately after such a binary event as a referendum. However, as we have previously pointed out, whatever the impact on the UK domestic economy from ‘Brexit’ (and no one really knows), don’t confuse the UK stock market with the domestic economy. Over 70% of the earnings of the FTSE 100 are derived outside of the UK, typically in dollars – so, whatever the immediate and indiscriminate response from the markets, many of the FTSE 100 businesses might actually see a temporary buoyancy from the impact of favourable exchange rate translation from overseas earnings in dollars into sterling profits and dividends. In the event of a ‘Leave’-induced slide in share prices, long-term investors need to ‘keep calm and carry on’.
A few thoughts on funds which are relatively well positioned for a more uncertain market climate:
- JO Hambro CM UK Opportunities: JO Hambro’s John Wood has adopted Warren Buffet’s maxim of “Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1” as his motto. This fund comprises a concentrated portfolio, currently of 27 stocks, which are mostly large, high-quality growth companies with robust balance sheets and predictable cash-flow generation. The fund has been running with a sizable cash weighting – currently 19.3% for some time, reflecting Wood’s cautious view on the markets which long pre-dates the Referendum, and is predicated on the distortions caused to asset prices by Central bank stimulus policies.
- Liontrust Special Situations: While this fund does have quite high weightings to small and mid-sized companies, parts of the market that could come under pressure, the fund has a very clear and distinctive approach, dubbed the Economic Advantage approach. This has proven very successful in tougher markets and should help the fund to weather periods of weak growth. The managers, Anthony Cross and Julian Fosh, look for companies with durable characteristics, such as ownership of intellectual property, recurring revenue streams and strong distribution channels, that enable them to sustain above-average growth throughout the economic cycle. One such example in the portfolio is EMIS Group, which provides software and data management systems to NHS health authorities.
- Threadneedle UK Absolute Alpha: In an environment of lower growth, just being “in the market” (through, say, an index fund), is unlikely to be the best strategy compared to both picking winners and identifying losers. Long/short funds have the tools to try and generate returns out of both the stocks that deliver and those that don’t. One of our favoured funds with such a strategy is Threadneedle UK Absolute Alpha, managed by Mark Westwood and Chris Kinder.
- Lazard Global Listed Infrastructure Equity: In a world of struggling growth, it could make sense to invest in infrastructure. This includes businesses involved in projects such as transport networks (toll roads, railways, airports and ports) and utilities, which often have monopoly-like characteristics, where demand is constant and revenues are contractually adjusted for inflation. Infrastructure spending is typically orchestrated by Governments and is very long term in nature and may be accelerated in tougher economic times to help stimulate economies.
- The Trojan Fund: This multi-asset fund, managed by Sebastian Lyon at Troy Asset Management, has a strong emphasis on capital preservation and is therefore built for tougher times rather than bull-markets. The fund invests in equities, index-linked bonds, gold and cash and short-dated bonds. The defensive position of the fund is reflected in a current position of 27% in cash and near-cash instruments.