Brexit marked the start of a number of significant events over the last year which started to really challenge whether it was the norm to expect the unexpected. On a personal level, it was particularly poignant for me as I joined the UK and European Equities desk of J.P Morgan Asset Management on 27 June 2016, the Monday after the vote. The widespread pre-vote sabre rattling gave me concern that I might, in fact, be shown the exit as soon as I arrived. However, much like the market itself, my Brexit-related worries did not come to fruition.
The atmosphere was surprisingly calm when I arrived on that day. There were the obvious signs that a major event had occurred but no mass panic or hysteria as I initially expected. There were clearly some staunch European supporters who were unhappy with the outcome, but the attitude was more of all hands to the pump to unravel what impact this result was having on the stock markets.
Never underestimate people power
Four months later, we had the US Presidential election. Once again, the world called the result wrong. Both the UK referendum and the US election, though, were seen as a protest against the establishment and there were noises that populism would continue to gain ground across Europe and, maybe even across the globe. What’s more, the results of these elections were a wake-up call to governments that the power of the people should never be underestimated and that they were answerable, not just to the large corporations, but to the whole of their populations.
Negative reaction to the result of the UK referendum was very obvious in the capital. Those in the cocoon of London had misjudged the mood of many in the regions, with the exception of Scotland and Northern Ireland which also voted to remain.
Expect the unexpected
So 12 months on, what has happened? Well, I’m still at the firm for starters, and am watching with interest the way the world has changed. Now more than ever, I expect the unexpected. I’ve spent the last 12 months speaking to investors about the ongoing uncertainty and the fact that no one knows how the UK’s divorce from Europe will end up. Does that mean that investors should ignore the UK? In my opinion, no.
We saw investors shy away from Europe for many years due to political uncertainty and they have missed out on some pretty solid returns. They are now just starting to invest again. In fact, certainty can actually make it more difficult to find opportunities. Active investing is all about identifying an investment opportunity where others cannot. If stocks are all moving in the same way then it is difficult for active managers to really show what they can achieve. We are now starting to see stocks be driven less by macro/political events and more by underlying fundamentals – and this should be good for active managers and give them the ability to demonstrate their added value.
Keeping clients at the heart of our business
The two big personal questions for me are firstly whether I am still happy to have joined this firm, in particular, and, secondly, this asset class. The answer to the first question is a definite yes. Of course, I would say that, but let me explain why. A client’s experience with this firm is paramount: after all, they are at the heart of what we do. I was initially concerned over the size of the firm I was joining and whether it was just some huge chest-thumping beast. From what I have seen this couldn’t be farther from the truth but its size does mean that it has resources available which other organisations simply do not have access to. These resources are there to ensure we give clients the best experience possible. We may not always succeed, but we learn from our mistakes and work towards constantly improving the way we operate.
Positive prospects for the asset class
This brings me on to the asset class. From an investment desk perspective, our Behavioural Finance team, and process, looks to reduce emotion in the decision making process by focusing on the fundamentals driving stocks. The investment team consistently evaluates itself to see if it can enhance the risk adjusted returns it delivers for clients. Many firms have research analysts but few have teams looking to research and re-evaluate the investment process. At this current time of unexpected outcomes, it is vital to reduce as far as possible any emotion in making investment decisions and this is exactly what this process is trying to achieve.
I cannot think of a better time for investors to really look at how emotional they are when they taking investment decisions. I have made some of the worst decisions in my life based on emotion and, I believe with the future uncertainty, focusing on fundamentals could not be more important.
An evolving opportunity set
I also find UK equities one of the most fascinating asset classes at the current time. The fundamentals driving this market are so varied. This is a market with significant exposure to a growing global economy and yet has a domestic economy going through an event which no country in the world has ever been through. Each step of the divorce process from the EU will result in positive or negative impacts for companies and this will keep evolving with every agreement made. What we have been shown though is that equity markets can flourish even when there is uncertainty. With the FTSE All-Share index delivering almost 25% returns since the day I joined the firm (Bloomberg as at 03 July 2017) —quite a result considering the forebodings of doom to the contrary.
I have told my two young children that the event they are living through is historic but at 7 and 8 years old I don’t think they really appreciate the significance! However, when I am a grumpy old man sitting in a pub, I have no doubt that I will be recounting stories, to anyone who will listen, of how I joined the UK and European Equity desk of J.P. Morgan Asset Management when the UK voted to leave the EU. By that time, and hopefully several years before I reach that stage, I truly believe that Brexit will be a blip on the history of the UK, but the path over the next few years will not be an easy one.
Believing in the best of British
We, as a country, have a history of really fighting through when we are backed into a corner. There will be difficult times ahead mainly driven by the rhetoric of politicians and the scaremongering of the press. From an investor’s point of view, selectivity and agility will be key. Focusing on the fundamentals and trying not to make emotionally driven decisions will give investors the best chance of riding this wave.
Harold Macmillan once said: “Britain has been great, is great and will stay great provided we … get on with the job”. I believe that we, as a country, will get on with the job and we will stay great.
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