Last week, prime minister Theresa May delivered a wide-ranging speech that sought to bring greater clarity to the UK’s position on the Brexit negotiations – but there’s still a long road ahead. We asked leading fund manager, Audrey Ryan, how she and her team are investing in uncertain times.
The clock is ticking for the UK. There is barely a year to go before the two-year notice period to leave the European Union expires, with a large amount for the government still to agree. What Brexit is ultimately going to look like, no one knows.
And that presents some really interesting challenges for UK-focused fund managers like Audrey Ryan. Each of the three Kames funds she co-manages are predominately made up of UK assets (Ryan is responsible for the shares element of these funds). The experienced fund manager’s portfolio positioning has to account for the Brexit ambiguity, whilst maintaining focus on her long-term investment objectives.
With the Brexit negotiations centring on crucial areas like trade deals, the UK companies that Ryan invests into are operating under varying degrees of uncertainty. A January 2018 survey by Ipsos Mori found 85% of major UK business leaders believe the government’s successful handling of Brexit talks is vital to their business. Two-thirds are not confident in the government’s ability to do this.
As Ryan explains, many major UK companies have an international dependency for profits, so the ultimate terms of Brexit are a key consideration, “Investing in the UK stock market allows access to both domestically focused businesses and those exposed to global growth. Approximately 70% of FTSE All-Share earnings are derived from international sales, and the balance from the UK. So the vote for the UK to leave the EU presents both opportunities and challenges for UK fund managers.”
Preparing for Brexit
The UK stock market’s global exposure can certainly be a positive during these uncertain political times. This was seen in the aftermath of the EU vote in June 2016, particularly with the fall in value of Sterling, compared to other currencies.
Ryan recalls, “The FTSE 100 fared better than the FTSE 250 initially following the EU referendum decision, given its exposure to international stocks with overseas and, in particular, US Dollar earnings.”
Ryan believes Kames’ preparation for the original EU Referendum vote was a useful precursor to the challenges that still lie ahead. “Following the Brexit announcement, our UK funds generally increased exposure to internationally-diverse businesses, which were beneficiaries of earnings upgrades given the move in Sterling. We also selectively reduced exposure to domestically-focused companies.”
As the UK government embarked on the long road of negotiations to formally leave the EU, Ryan and her team have kept Brexit uncertainty at the forefront of their planning.
She explains, “We believed the strongest corporate earnings momentum would be found in companies with stock-specific growth, which was in excess of the background market – no matter what sector – and businesses with international earnings. We saw opportunities to add to stocks in a variety of different industries, sectors and indices."
The road ahead
Like everybody else, Ryan and her team are keenly following developments and the type of Brexit the government can agree with its EU counterparts. She is optimistic greater clarity will ultimately help UK businesses.
“The Government is currently making some progress with the Brexit negotiations and we continue to monitor the developments very closely. As we work through the Brexit detail we would hope it will lift some of the uncertainty still surrounding the outlook for the UK economy.”
And what does she anticipate will happen? “The past two years have reminded us to ‘expect the unexpected’ with regards to politics!” she bats back. “Sterling is back to pre-Brexit levels, benefiting from the broad US Dollar weakness and recent strong employment data. We remain mindful of the pressures on the UK consumer against a backdrop of interest rate rises.”
With the government having secured provisional agreements on the rights of EU citizens living in the UK and British people living in Europe, the current stage of negotiations is crucial. Between now and June, talks are focused on trade agreements. The final stage (July to October) includes negotiating a transition period for the UK and Europe in the aftermath of the exit. So what is agreed – and not agreed – over these next seven months will have big implications for UK businesses.
“The geo-political uncertainly is likely to continue as we progress through the first half of 2018, with the prospect of market volatility,” concludes Ryan. “We as active fund managers cannot influence the macro factors, so we continue to focus on investing in businesses where we see attractive growth opportunities and the potential for superior returns, driven by an uplift in the valuation and/or or positive earnings momentum.”