Europe: One month on from Brexit

 

One month on from the ‘Brexit’ vote, European (ex-UK) equity markets have almost fully recovered from the near 10% drop in the days following the UK referendum result. The shock result moderated rate hike expectations in the US which helped to strengthen US equities and restore some calm to the European markets. Investors were further reassured by the ECB’s readiness to act if required.

With bond market strength leading to a further evaporation of yield available to investors, stable growth sectors, such as healthcare and consumer staples, received valuation support – while cyclical areas, such as airline and hotel companies, felt pressure due to uncertainties surrounding the impact on activity. The financial sector saw some stress, as investor fears over Brexit shifted to the ongoing problems in the Italian banking sector, which is plagued by high levels of bad debts in the system. 

In currency markets, the euro has appreciated by about 9% against sterling and dropped by roughly 3.5% against the US dollar. Therefore, European companies with exposure to the UK have been under pressure – due to the effect on earnings by the combination of lower activity, reduced earnings in euro terms on translation and the potential for negative asset value impacts. However, there is the opportunity for European companies to invest further in the UK over the medium term.   

It is still early days in terms of assessing the economic impact of the Brexit vote and it will take a few months for more definitive economic figures, such as GDP prints, to come through.  Investors will focus initially on surveys like the Purchasing Managers Index (PMI) and the more recent German IFO survey which were generally better than expected with a smaller drop than forecast.  Economists have reduced expectations for European GDP for the full year in 2017 by about 0.5% but these are really only initial estimates.

It is a more severe picture in the UK, with the PMI falling from 52.4 to 47.7 – signaling the potential for a sharp economic contraction. However, as this data was taken soon after the referendum result, the prevailing state of shock could have overstated the negative effects. Economists will be examining upcoming data points to assess the implications for the UK, but most expect significantly lower activity in the second half of 2016 and the start of 2017. 

With the political situation somewhat stabilised in the UK following the appointment of Theresa May as Prime Minister, the delay to invoking Article 50 and the subsequent two-year timeframe to exit the EU remains an overhang and the markets will be looking for signs of either compromise or confrontation between the UK and the EU.

 

Past performance is not a guide to future performance. The value of investments can fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.

This information is for professional advisers only. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and are subject to change at any time without notice. The contents of this article are not intended as investment advice. The Canada Life Investments blog page features images licensed from Getty Images International. These images shall not be downloaded, republished, retransmitted, reproduced or otherwise used in any way. Aside from the above, and unless otherwise stated, Canada Life retains copyright in and/or has a right to use all contents of this website (including text and graphics) and such contents shall not be copied, distributed, extracted or modified without the express prior written consent of Canada Life unless for private, non-commercial use.

Iain McNeill

Iain McNeill

Senior Portfolio Manager, European Equities

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