The date for Britain’s departure from the European Union is still very much TBC. Prime Minister May went to Brussels to ask for an extension beyond the 29 March deadline, and assuming a deal is finally agreed to by the House of Commons, Britain will have until 22 May to complete the withdrawal. If a deal doesn’t pass, the cliff-edge is moved back to 12 April.
While the British parliament is adamant that a no-deal scenario must be avoided, a ‘hard Brexit’ remains on the cards so long as no deal is forthcoming. Then again, even if a deal is made, it is difficult to know what the ramifications will be for markets and the economy. Given the event risk this represents, Lonsec has surveyed the global equities universe to create an overview of product exposures for the UK and Europe. The UK represents 6.2% of the MSCI World ex Australia Index and the EU countries ex-UK represent 16.3%. In short, at least one fifth of the index is directly exposed to Brexit.
These exposures presented below represent a point-in-time snapshot (December 2018) and are subject to change as these are actively managed strategies. It is worth noting that any adverse outcomes for fund managers who are over- or under-exposed to the UK and Europe could be largely offset by subsequent currency movements.
Several managers have significant UK and EU exposure
The below chart shows global equity funds with greater than 10% exposure to the UK. For comparative purposes, the reference index’s composition includes 6.2% exposure to the UK.
Global equity fund managers’ European exposure (%)
Value managers tend to have the highest Brexit exposure
The below chart demonstrates the propensity for ‘value’ managers to be overweight UK domiciled securities. Value investors typically target stocks which they deem to be trading at below their intrinsic value and are therefore not representative of the company’s long-term fundamentals. Lonsec posits that this could be reflective of the harsh depreciation that UK securities have experienced during the Brexit fiasco, which on this metric could be looking attractive to ‘value’ orientated investors.
Average UK exposure by sub-sector (%)
Location of fund manager’s HQ can create an investment bias
The below chart illustrates the proclivity for global equity fund managers domiciled in the UK to be overweight domestic equities. This may be reflective of a home bias which is common for fund managers due to the greater familiarity and understanding of their domestic market.
Office locations of managers with >10% UK exposure
10% UK exposure” width=”561″ height=”301″ class=”alignnone size-full wp-image-5666″ style=”margin: 0;” />
Protecting against Brexit chaos
Given the significance of the European and UK markets, the Brexit issue is not one that investors can afford to completely ignore. The challenge, however, is not in the evaluation of the risks associated with different outcomes but in managing the uncertainty involved in determining both the market’s reaction to developments and the short- and medium-term economic impacts. For wealth managers who recommend global exposure for their clients, this creates an extra layer of complexity in determining appropriate investment products and asset allocations.
The Brexit issue, along with other geo-political risks, are actively considered by Lonsec’s investment committees and feed into our model portfolio weights. Addressing these challenges requires a diverse mix of expertise, combining macro-economic, portfolio management, and research capabilities. For those interested in the broader topic of managing uncertainty in a portfolio context, our upcoming Lonsec Symposium is a must-attend event that will draw on the knowledge of Australia’s leading strategists and retirement experts.
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