01 July 2016

Blog: BREXIT - Well, we all got that slightly wrong...

by Richard Feigen | 01 July 2016

Along with everyone else, we were mildly surprised to wake up on the morning after the referendum to find that the UK had voted to leave the EU. Six weeks ago we hosted a BREXIT Debate and heard speakers from both sides argue their cases to an invited audience of fund managers, who at the end indicated that they were marginally in favour of remaining in. It was close until the beginning of the last week of campaigning when it appeared that the British were going to behave in their usual manner and vote to keep the status quo. They didn’t and the markets were totally wrong-footed, as demonstrated by the fact that overnight on the Thursday of the vote sterling hit both a six month high and a six month low. The following Monday the yield on UK government securities (Gilts) dropped below 1% for the first time in history.

Property companies, banks, recruitment companies and house builders have all been particularly hard hit. By the market close on the 27th British Land had fallen by over 27%, Barclays Bank over 30% and Barratt Developments by almost 40% since Thursday night.

By midday on the 28th there has been a recovery in both share prices and the pound but the lack of certainty will weigh heavily on equity and currency markets for some time to come.

However, looking to the longer term, it is clear to us that some investors had already positioned themselves for this eventuality. Speaking to our main contacts at many investment firms they told us that:

On average UK private client portfolios were running near 10% in cash as managers reduced exposure to equity risk ahead of the vote.

This figure for PCFMs is well above the global average cash allocation of 5.5% reported by participants in Bank of America Merrill Lynch's monthly institutional manager survey in May

We estimate that around £25bn has been switched from UK equities to cash in the current year, most of it held by PCFMs

Many are now planning to re-deploy this back into the market

Another common theme is that investors would like more clarity from the politicians on the expected impact of BREXIT and there is a clear information vacuum developing. Investors are keen to understand how stocks are impacted, but are also aware that there is limited information available to company management. Several companies have issued announcements trying to provide some visibility and some imploring the government to be quick in resolving the EU regulatory issues that relate to their industry.

It may take some time before equanimity returns to the markets but, inevitably, it will happen and investors will need to deploy their cash reserves or suffer the drag of cash earning virtually nothing. The governor of the Bank of England has already indicated that he is willing to lower rates further in the current year. Investors are still keen to see companies and we have found no reduction in interest to meet management teams whatsoever. It may take a little longer before buyers appear en masse but those companies that are out explaining their investment story now will reap the rewards of that effort.