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Beware Brexit blindness

Investors cannot afford to be too UK-centric nor under estimate how political uncertainty in Europe and the US will play out in terms of global risk, says Anthony Rayner, manager of Miton’s multi-asset fund range

It’s easy to assume that the Brexit vote, and the related political and economic uncertainty, means UK equities should be a no-go zone for the short to medium term. We think this misses the wider picture.

As global multi asset investors, we can’t afford to be too UK-centric. We try to look at events from a number of different angles. If we just read UK media we could easily believe that the UK is blighted by extreme political risk. However, the UK doesn’t operate in a vacuum and, while political uncertainty has undoubtedly risen, it has also risen in Continental Europe, arguably more so, and in the US. This is far more relevant to global risk.

Europe has solved very few of its problems. The refugee crisis remains, with its very relevant knock-on effects which shouldn’t be ignored just because of media fatigue. Angela Merkel, previously seen as the glue that keeps Europe together, has been much weakened. Meanwhile, economic issues, including slow growth, high unemployment in southern Europe and material inequality also continue to blight the region. This is important because it feeds the populist dynamic and there are a number of key political events coming up. Namely, an election in France, where the national front are polling very strongly, Italy’s referendum on political reform, where prime minister Renzi initially suggested he’d resign if it fails, and in Spain, which still doesn’t have a government and might face a third election to try to form one.

In the US, populist firebrand Donald Trump is doing a wonderful job of making UK politics look stable and fully functional, which of course it isn’t. But it’s also important not to view developments in other countries through the lens of the UK. For example, some view a Trump victory as more likely than is widely anticipated because he is seen as the populist anti-establishment underdog and compare this to some of the dynamics behind the Brexit victory. Similarly, they view Hillary Clinton as the establishment, continuity option, just as the Remain option was.

There are some parallels but they miss two fundamental factors: the demographics are very different in the two countries (specifically that the non-white vote, not natural hunting ground for Trump or Brexit, is much larger in the US than the UK) and the broad left is unified against Trump, unlike the UK and Brexit. Two major obstacles, not widely appreciated, which suggest that some UK investors might be too pessimistic about US political risk.

This is all important context for Brexit. That’s not to say everything’s rosy in the UK. Negotiations will take a long time, partly because they’re complex but also because the EU is fairly dysfunctional, and because the European political events outlined above will dominate priorities.

So, if the UK’s not that bad after all, what do we think about UK financial assets? In equities, we retain a material bias to overseas earners, which side-steps the uncertainties around the UK economy, and should benefit from a weaker sterling, which is our base case over time.

We’ve also been building our exposure to infrastructure stocks, to benefit from our belief that the approach to boosting the economy will move, albeit slowly, from experimental central bank policy to government spending on infrastructure. In short, a big part for us in being pragmatic investors is looking through the psychological scarring of past events, which allows us to pick up opportunities that might be missed by the broader market.

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