As the second quarter drew to a close, the United Kingdom held a referendum vote on whether to remain a member of the European Union (EU). The poll resulted in 52% of voters electing to leave, which shocked investors, as it was in contrast to opinion polls, consensus views and recent market action (all of which indicated the UK would elect to remain).
While there is no precedent for a member state leaving, basic guidelines indicate that a county can exit the EU by invoking Article 50, which would then be followed by a two-year process, during which negotiations would take place while the county (in this case, the United Kingdom) unwound its membership. Initial global market reactions were volatile, likely due to the uncertainty surrounding the process and the potential implications of such a decision, which may not be known for some time. However, since then, markets have rebounded, as fears have subsided and a sense of calm has returned.
As is the practice at Portfolio Evaluations, research team members were in constant contact with fund managers across asset classes in advance of this vote and have remained in touch as the process begins to play out. Conversations with our international fund managers prior to the referendum vote revealed that most, if not all, portfolio managers were undertaking the process of stress testing their portfolios for this binary event. The result across a broad spectrum of our international funds was that no significant action was taken to revamp exposures or holdings as the majority of fund managers expressed comfort with the multi-national make up of their underlying holdings. Basically, although companies may be domiciled in UK, the revenue streams of such companies are quite diversified, indicating less risk from the domestic UK economy itself.
In the immediate aftermath of the vote, our active communication with fund managers continued, with the majority indicating that they were not making significant directional moves within portfolios given the lack of transparency surrounding the process. However as the dust settled, most international fund managers began the process of identifying solid buying opportunities. After the Brexit vote the idea of a “domino effect” of other countries racing to leave the EU became less likely and fears of a highly contentious “leave process” diminished. While the ultimate implications of the “leave decision” will only be visible in hindsight, according to most fund managers pockets of opportunities are being found.