Tuesday 28 June 2016
Brexit: impact on investments
Tuesday 28 June 2016
On Friday 24th June, in a result that shocked the market, the UK voted to leave the European Union (EU). With this vote comes much political, economic and financial uncertainty both for the UK and Europe. This note summarises the immediate views of Macquarie Investment Management’s investment teams.
What does Brexit mean for our active portfolios?
Fixed Income: Macquarie Income Opportunities Fund and Macquarie Diversified Fixed Interest Fund
The Funds have generally been positioned in a balanced to defensive stance over the past 18 months to 2 years, in effect taking modest positions in better value credit markets and holding duration as a counter-balance. This balanced positioning means we are likely to move through the Brexit situation without significant performance implications. While our credit positions will likely detract from performance, the duration positions should provide a solid offset.
With relation to the credit positioning across the Funds, the immediate price action has left spreads modestly to moderately wider. However, credit spreads were already cheap relative to historic averages. Importantly, we are confident in the modest exposure we have to issuers that we view as being directly affected by the result as the risk-return outlook for the holdings are attractive.
Our focus post Brexit is on determining whether this vote and its implications have structurally altered our base case medium-term outlook of the markets ‘muddling through’ where slow growth is accompanied with central bank support. We will continue to monitor the market reaction and possible policy maker interventions closely and assess whether a shift of positioning the Funds to being more defensive is appropriate.
Australian Equities: Macquarie High Conviction Fund
From an Australian equity perspective we saw a significant fall on Friday and a positive, albeit volatile start to the trading week.
Sectors that fell on the back of the Brexit vote were, banks, diversified financials (in particular the global fund managers) and industrials that have exposure to Europe and the UK.
On the flip side, utilities, infrastructure and US exposed companies fared well in this risk off market. Gold and gold companies performed particularly well.
The Macquarie High Conviction Fund has performed fairly well with positions in financials balanced by positions in gold, utilities and US exposed companies.
Looking ahead, we expect markets to remain volatile in the near term. While this will potentially result in some continued volatility for the High Conviction Fund, we anticipate some good buying opportunities.
Asian Listed Equities: Macquarie Asia New Stars No.1 Fund
Asian markets were not spared the volatility caused by the Brexit vote. Within Asia ex-Japan, we favour companies leveraged to domestic demand and local consumption which are less exposed to global markets in terms of fundamental earnings and balance sheets.
We have little exposure to exporters and do not expect any significant risks arising from the Brexit event. Our portfolio positioning has not changed and we remain focused on fundamental earnings quality and corporate governance.
Asia ex-Japan equity markets are relatively less exposed to Brexit given the low trade exposure of 4% of GDP. North Asia (especially China) is relatively better positioned with a current account surplus.
We continue to monitor market developments and company earnings, looking for good buying opportunities.
Global Equities: Macquarie Professional Series
The Macquarie Professional Series investment managers expect a period of elevated risk as the details of the UK’s exit strategy are worked out. Managers will continue to monitor their portfolios as the situation develops and respond accordingly. We expect investment managers will continue with their stringent and well tested investment processes and have been prudently managing risk around this scenario.
Each of our managers will provide an update in their upcoming June reports and will discuss the result at the upcoming quarterly webinar series.
Listed Infrastructure Securities: Macquarie International Infrastructure Securities Fund
Given the potential for continued market uncertainty, we have stress-tested valuations for scenarios of weaker economic growth and remain broadly comfortable with our holdings. We believe international infrastructure securities remain a good source of defensive yield in this environment with a demand outlook more stable than most due to the ‘essential service’ nature of many infrastructure assets.
Overall, as at the end of Friday, the Fund’s exposure to the UK was 5% and to Europe was 24% (excluding Switzerland, at 2%). We hold two UK listed stocks – National Grid (the larger position) is a regulated electricity and gas utility that has cash flows tied to a regulatory agreement with the UK regulator, OFGEM. Its regulation is not overseen or governed by the EU. Pennon Group, our other UK holding is likely to benefit from lower interest rates and potentially higher inflation given an inflation linkage in the revenue line.
We believe, the team and process remain positioned to manage the expected higher volatility in markets. We remain vigilant to mispricing across the current portfolio, as well as stocks covered by our team of analysts.
Conclusion, so far
The UK faces a likely slowdown in economic growth and an uncertain relationship with Europe as it re-negotiates new agreements. Market risk has increased with investors seeking safe-haven assets and general risk aversion. Despite this uncertainty, we believe that central banks globally will continue to be supportive and not allow this single, although significant event, to undue their efforts to support markets since the Global Financial Crisis.
As active investors, one thing we can do in the wake of Britain’s exit is to keep in mind that market volatility often yields significant investment opportunities for managers that emphasize diligence, patience, risk management, and a commitment to research.
We will provide additional insight into the benefits of active portfolio management in light of Britain’s departure from the EU, in our regular monthly reporting and at the upcoming quarterly webinar series.
This information is confidential and is provided to licensed financial advisers, professional investors and investment researches only. It is not to be distributed to, or disclosed to, retail clients.This information has been prepared by Macquarie Investment Management Australia Limited (ABN 55 092 552 611 AFSL 238321) (Macquarie), the issuer of units in the Funds referred to in this presentation (collectively the ‘Funds’) and Macquarie Investment Management Global Limited (Australian Business Number 90 086 159 060 Australian Financial Services Licence Number 237843). The information in this document is provided for general information purposes only and is not, and should not be construed as, an advertisement, an invitation, an offer, a solicitation of an offer or a recommendation to participate in any investment strategy or take any other action, including to buy or sell any product or security or offer any banking or financial service or facility by any member of the Macquarie Group. This document has been prepared without taking into account any person’s objectives, financial situation or needs. Recipients should not construe the contents of this document as financial, investment or other advice. It should not be relied on in making any investment decision.
In deciding whether to acquire or continue to hold an investment in the Fund, an investor should consider the Fund’s offer document. The offer document is available by contacting us on 1800 814 523.Past performance information shown herein, is not a reliable indicator of future performance. Future results are impossible to predict. This document may contain opinions, conclusions, estimates and other forward-looking statements which are, by their very nature, subject to various risks and uncertainties. Actual events or results may differ materially, positively or negatively, from those reflected or contemplated in such forward-looking statements. In preparing this document, reliance may have been placed, without independent verification, on the accuracy and completeness of information available from external sources. To the maximum extent permitted by law, no member of the Macquarie Group nor its directors, employees or agents accept any liability for any loss arising from the use of this document, its contents or otherwise arising in connection with it.
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