Brexit – Keep Calm or Take Cover?

In the wake of the UK’s vote for a Brexit last week, politicians in both the UK and Brussels may be uncertain of their future, but should investors be panicking, and will Brexit present opportunities for investors once the dust settle?

One of the UK’s most famous hedge fund managers, Neil Woodford, says that investors need to look beyond the short-term fears hitting the markets following the UK’s vote to leave the European Union, and focus on the long-term gains that can be made as a result of Brexit.

Woodford rose to prominence as one of Britain’s best-performing fund managers while in charge of the Invesco Perpetual Income fund, managing just over GBP10 billion. He left in 2014 year to set up his own firm, Woodford Investment Management.

Woodford’s GBP8.5 billion Woodford Equity Income fund has returned 15% over the past two years, compared to just over 1% for the average fund in the sector in the same time period.

 

In a blog post published on Friday, Woodford describes Brexit as being “not as negative a development” as the markets think, and goes on to argue that in the long-term, Brexit will actually benefit the UK.

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“Markets are clearly shocked by the decision but, in our view, it is not as negative a development as the market’s initial reaction appears to imply,” Woodford wrote.

“We have been clear in our thinking on the economic implications of Brexit for some time. The independent report that we commissioned on the subject concluded that Britain’s long-term economic future would be largely unaffected by a decision to leave the European Union. We stand by these conclusions.”

Markets crashed across the world on Friday as the uncertain future of the UK weighed on sentiment, and market participants reacted to a shock victory for the Leave campaign. As polling closed on Thursday night, the markets had priced a victory for the Remain campaign at more than a 90% probability.

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“In the near-term it is likely that UK GDP will be lower over the next 18 months or so than if we had voted to remain. But, because inflation will (temporarily) be higher following the fall in the pound, nominal GDP could well be little changed. Growth in consumer cash flow will be marginally lower, principally because fuel prices will be higher but of course exporters will enjoy something of a windfall.”

“In the longer term, it is my view that the trajectory of the UK economy, and more importantly the world economy, will not be influenced significantly by today’s outcome.”

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However, Woodford does agree that in the coming months, uncertainty will rack the markets, and that will likely be a big negative. “That is not to say there won’t be challenges in the near-term. There will. We now face a period of uncertainty as the exact terms of Britain’s exit from Europe are negotiated. Financial markets loathe uncertainty as amply demonstrated by this morning’s reaction across all asset classes.”

He added, “We have been cautious on the outlook for the economy over the medium term, so it’s not as if we are presenting a rose tinted view. We think global growth will continue to slow, which is a headwind for corporate profits, we think commodity prices will remain lower, and that China will slow, it is already slowing in our view, despite the stimulus measures that have been introduced.”

Woodford continued, “we are not forecasting a recession in the UK, I know that’s a controversial view because many people are forecasting a recession in the near future. We think growth will be a bit slower in the UK than it would have been if there was a remain vote. But I think people got too caught up in the negatives around the consequences of the referendum, and we are seeing that in the markets, but I didn’t believe the negatives that were put forward during the campaign and I don’t believe them now.”

He added, “the way to profit is to keep your head while all around are losing theirs. The fundamentals prospects for the companies in which we are invested have not changed. If the fundamentals have not changed but the prices have fallen, then by definition the investment case must be stronger.”

Elsewhere in the British hedge fund industry, Crispin Odey, another of the UK’s most prominent money managers, reportedly made a huge sum on the outcome of the EU referendum after shorting European stocks in the expectation of a Brexit, according to Bloomberg. Odey hit headlines earlier this year when his USD10.2 billion firm, Odey Asset Management, made millions betting on Sports Direct.

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