Where to invest in the Aftermath

Adrian Lowcock, head of investing at AXA Wealth, considers what Brexit means for the major regions and where investors should put their money following the shock result

Where to invest in the Aftermath

Markets and investors have had a few days to digest the events of Thursday’s EU Referendum. The FTSE 100 is subdued with domestic banks and housebuilders showing large falls.  Sterling has weakened further but we’re are not seeing collapse in the currency.

The initial reaction is always a knee jerk one and some stocks will overshoot on the way down (and up). However, the vote to leave the EU is going to weigh on markets for some time. The global impact is still unclear but an interest rate rise in the US looks off the cards for now.  Political risk has risen significantly following the vote and investors are likely to remain risk averse whilst the political situation resolves itself.

UK

Despite the shock result on Friday markets held up relatively well with the FTSE 100 up 2% on the week. However, within that headline figure there were some big swings because sterling fell significantly on the news. The sectors that suffered the most were housebuilders, banks, airlines etc. That is those companies with the most domestic focus or sensitive to the fall in sterling. Whilst those companies with global earnings or which are not economically sensitive have benefited.

In the short term the outlook for the UK economy has been widely downgraded. A weak pound is not good for UK importers although it will benefit companies whose revenues are earned overseas such as the pharmaceuticals industry and means UK companies are more attractively valued to overseas investors.

Given the outlook for the UK remains unclear and with the political landscape still in turmoil things are likely to remain volatile for some time and further falls in share prices are possible. This volatility will create opportunities but investors will need to take a long term view.

CF Woodford Equity Income – Neil Woodford hasn’t made significant changes to the portfolio due to the results of the Referendum and generally expects over the medium term the impact on the UK economy will be negligible. However, he is generally defensively positioned with larger exposure to tobacco and pharmaceutical businesses, both areas which will benefit from a weaker pound whilst their global exposure will protect them from any deterioration in the UK economy.

Europe

European markets also suffered as a result of the news, and stock markets fell further on the mainland last Friday, partly because the euro held up better than sterling. Whilst the economic outlook for Europe has been slowly improving, the political risk for the region has now increased dramatically.

With elections in France in 2017 and in Italy in 2018 there is genuine concern the European Union could be at risk of breaking up. Italy, in particular, has a strong political movement which is pro-leave. At the same time Europe is still recovering from the financial crisis. Given the increased risks for the region we are cautious on Europe for the time being.

US

The US dollar strengthened against sterling and the euro as it is the world’s reserve currency and a safe haven asset in these conditions.  Whilst the US stock market is not cheap, corporate earnings remain higher quality and are generally more stable than other regions – as such the US does warrant a premium over other developed markets such as the UK, Japan or Europe.

The outlook for the US corporate earnings has improved and we expect them to rise over the next few months. The chances of the US raising interest rates in July looks to be off the cards and we only expect one interest rate rise this year, if at all.  We favour the US defensive sectors and large cap companies in the region.

JPM US Equity Income: This fund has exposure to the defensive areas of the US market, particularly in the US large cap space which provides access to some excellently managed businesses.

UK Treasuries

The yields on gilts have already come down, with the yield dipping below 1% for the first time as the news of the Brexit result sank in and investors switched into defensive assets. We expect this asset class to remain in favour as we expect the outlook for UK growth to continue to fall and the political risk to remain high. However investors need to remain active in this space given how low yields have fallen to.

BlackRock UK Gilt All Stocks tracker: Given the yields now available on this asset class, keeping costs low is critical to the total return on the investment. This fund has a total expense ratio of 0.11%. Investors considering this option will need to be active and keep up to date with changes in the outlook for gilts.

 

Please remember, no news or research item is a recommendation to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest.

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