Since the Brexit vote, the headlines have been punctuated by pessimism over the potential impact on the UK economy. But UK equities have defiantly continued their upward path with the FTSE 100 and FTSE 250 breaking through all-time highs. This has led to mixed views on the real implications of Brexit for the UK. Those who voted to leave the European Union (EU) claim that the impact of Brexit has been overstated, while those who voted to remain argue that this is simply the calm before the start that will be unleashed when the prime minister pushes the Article 50 button.
UK equities and the UK economy are not one and the same
We believe that the UK stock market is not a proxy for the UK economy. This is particularly true when looking at the FTSE 100, whose constituent companies generate 70%—80% of their revenues from overseas. These companies are less concerned about what is actually happening in the UK. Thanks to the global nature of their operations, they are more interested in what is happening around the world. If the global economy struggles to grow, companies around the world—not just the UK—will be affected. But even in this scenario, UK companies would be protected by the positive impact on their earnings from the appreciation of overseas currencies vs. sterling.
Sterling weakness creates attractive buying opportunities
As the fifth-largest economy in the world, the UK will remain an important commercial hub, whether it is a member of the EU or not, due to its legal system, infrastructure and international exposure. This view has been supported by significant newsflow relating to mergers and acquisitions, pointing to the fact that many corporations see the current situation as an attractive opportunity to buy companies at a cheaper price due to the weakness in sterling. There have also been announcements of multinationals headquartering their European operations in the UK.
Source: Bloomberg, data from 31 March 2004 to 30 September 2016. The opinions and views expressed here are those held by the author at the date of publication which are subject to change and are not to be taken as or construed as investment advice.
A clear opportunity for active managers
At the domestic level, there is an optimism which we have rarely seen since the global financial crisis. The most recent PMI for manufacturing beat expectations once again, the Citi Economic Surprise Indicator reached a three-year high in August and earnings momentum is strong.
Of course, not all UK companies will benefit from the UK’s exit from the EU. Companies that source their products from overseas will struggle to absorb the increased costs they are experiencing on the back of the currency. However, from a UK equity investor perspective, this economic backdrop and misunderstanding about market drivers presents a real opportunity for active managers who can identify the winners and losers—whatever the path to an exit from Europe involves.
Read more about J.P. Morgan Asset Management’s UK equity fund range:
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