What has the Brexit vote done for your investments?

Two years since the vote and it’s all still to play for – in more ways than one

In case you’d somehow missed it, the UK voted to leave the European Union two years ago this week. The vote stunned the nation, regardless of which side of battle lines you were on.

Sterling plummeted, UK equities went into meltdown. Business investment stopped and inflation, well, stirred. “Moving to Frankfurt” started cropping up in City-based conversations and suddenly there was a great deal of interest in Irish heritage among the rest of us.

Today, the concerns remain, investors are uncertain and an economic slowdown still threatens. And yet the stock market is enjoying some remarkable highs.

Confused? You’re not alone. Almost one in 10 investors who voted Remain now report they would vote Leave, according to research by The Share Centre.

Winners and losers

So far the winners in this astonishing period of political and economic volatility have been the UK’s smaller companies. The FTSE Small Cap index has returned 38 per cent over the past two years compared with the FTSE 100’s 31 per cent.

Actively managed funds have come into their own since the Brexit vote, shrugging off recent questions over the extra costs involved in paying for a person to make decisions, rather than passively investing in a fund which follows the index.

In fact, the average IA UK Smaller Companies fund has returned almost 49 per cent since the vote. European Smaller Companies funds only just beat that over the same period.

“Some investors may be surprised that UK small caps have done so well since the referendum, given they’re generally more domestic-facing than their large-cap and mid-cap peers,” says Darius McDermott, managing director of Chelsea Financial Services.

“Small caps were in fact beaten up in the runup to the referendum and, at one point, were sitting at a hefty 20 per cent discount relative to the FTSE 100.”

But when investors realised that the UK economy may not be doomed after all, this discount shrunk to about 10 per cent today as they snapped up the stocks which had unfairly been tossed in the bargain bin. The weaker currency also increased mergers and acquisitions activity, as overseas buyers sought attractively priced UK smaller companies.

“With both British and European officials now suggesting we may not get any Brexit agreement until November or even December this year – just three months before we are due to leave the EU – I think it is fair to say nobody knows what will happen over the next few years,” McDermott adds.

“For now, and for at least over the medium term, the key will be to keep calm and carry on, making sure your portfolio is well diversified. There is bound to be more stock market volatility, but that will allow brave investors to perhaps pick up some homegrown bargains along the way.”

Now what?

So what are these active managers thinking these days? And where do we go from here?

“With the UK economy showing one of the slowest economic growth rates in the G7 it is hard to argue that Brexit is not having an impact,” warns Neil Hermon, fund manager of Henderson Smaller Companies.

“The uncertainty caused by the drawn-out negotiations is causing consumers to rein in spending with weakness noted in areas such as the secondhand housing market and big ticket purchases such as cars, furniture and carpets.”

For Georgina Brittain, co-manager of JPMorgan Mid Cap, and others, the leisure industry is a no-go area as consumers continue to worry about the future – choosing not to spend on the non-essentials. However, she adds: “We do find pockets of significant value in certain domestically exposed areas such as the challenger banks and the brick companies, and we also favour technology companies such as Sophos.

“We see an ever-faster pace of disruption amongst UK plc, and nowhere is this more keenly felt than on the high street,” agrees Jean Roche, co-manager of Schroder UK Mid Cap. “Companies which are not carrying out the disruption or adapting to take account of this disruption will themselves be ‘carried out’.

“There are opportunities for management teams which are nimble and creative to take advantage of disruptive trends. The economy can support this because companies and households continue to spend. And mid-cap UK companies, being smaller by definition than large companies, are most likely to be able to adjust to the new normal – elephants rarely gallop.”

See the UK, see the world

What many fund managers agree is that we have to try to look past the noise and determine what the brave new world will look like when we come out the other side – Brexit or not.

In many ways, Brexit is merely the background noise to rapidly changing consumer demands and culture that are evolving regardless.

“We believe nearly every industry is undergoing change right now, often disruptive change, and any industry in flux creates opportunities both from a long and short perspective,” says Dan Whitestone, portfolio manager of BlackRock Throgmorton Trust.

“One aspect of industry change we are drawn to is changes in distribution. The apps on your smartphone illustrate many industries that have been disrupted through changes in distribution, creating pressures for legacy incumbents as well as revealing a wave of exciting emerging companies.”

“The outlook for the UK domestic economy remains challenged and the recent evidence would suggest it is deteriorating,” he adds. “This has had a notable impact on the share prices of many domestic companies with several market participants highlighting the value on offer.

“However, whilst many of these UK consumer shares may appear cheap on valuation metrics like ‘price to adjusted earnings’, this fails to take into account the levels of debt and poor cashflow some of these companies exhibit.

“As such we remain cautious on UK domestics in general but remain very positive on the outlook for UK plc. We think the UK is home to many compelling investment opportunities where the revenues and profits are generated outside the UK and the companies have a leading differentiated competitive offering. The outlook for these investments is tied to the global economy which remains robust.”