Fund Manager Debunks Brexit Impact on ‘UK Plc’

Brits investing online in companies listed on the London Stock Exchange, either individually or through funds, have been bombarded by negativity over the past couple of years. However, in a recent interview with Morningstar, the financial data company, one fund manager doesn’t see why UK-listed companies should be negatively impacted by Brexit. He also doesn’t think they will be once markets become less emotional.

The LSE’s major indices, from the FTSE 100 to All-share did well last year but trailed most major international peers in the USA, Europe and much of Asia as the world economy roared ahead. That, the consensus of opinion holds, was due to uncertainty around how Britain’s economy will fare in our post-EU landscape. We’ve written here about domestic and international assets managers reducing, sometimes drastically, their exposure to UK equities. A recent Bank of America poll of international asset managers put London-listed equities at the bottom of a pile of 22 asset classes including emerging market equities, bonds, cash and industry-specific equities indices such as banks and tech.

However, speaking to Morningstar, Simon Gergel, fund manager of The Merchants Trust, sees no logic in why that should be the case. And his arguments are not simply based on an optimistic outlook around the unknown quantity of the post-Brexit UK economy. Gergel is quite ready to admit that Brexit is a risk to the UK economy and it is impossible to predict how we will come out the other end of the process of rebuilding new trading partnerships. However, he looks at the industries represented by the majority of companies listed on the LSE and doesn’t see much vulnerability to that uncertainty:

“19% of the UK market is oil and mining, 7% is pharmaceuticals, 10% is consumer goods. The UK stock market has very little to do with the domestic economy or trading across borders.”

He believes that if the LSE was dominated by big agricultural firms or car manufacturers, it might have a problem. But it’s not, so shouldn’t:

“We visited a £1 billion company the other day. It only relies on Europe for 3% of its business. 10% of its business is dependent on the UK. Brexit really is not that big of an issue, and any increased costs will be offset by sterling.”

In the shorter term the risk of Brexit is, in Gergel’s opinion, a secondary one. An economic shock to the UK and hit to consumer confidence could cause a recession or significant economic slowdown. That would translate into nervousness in markets and a drop in London Stock Exchange values. However, retail stocks, listed pubs and restaurant groups, travel companies and potentially supermarkets with a strong reliance on domestic earning would be the only real casualties.

While the Morningstar interview does not extrapolate, the assumption must be that if Gergel is right, markets will eventually realise that and the valuations of UK-listed companies will return to their fundamentals. Bargain Britain, then, might be a good mantra for those investing online over the next couple of years.