Fund manager view: Corporate Europe remains upbeat despite Brexit shock
Just over two months on from the Brexit referendum, the market appears to be supporting our rather more positive view on the possible impact upon corporate Europe.
The economic outlook for the UK, of course, remains very uncertain – with survey data released since the vote has suggesting a sharp slowdown looms. Most notably, the manufacturing, construction and service purchasing manager indices sharply in July – the worst figures reported since the depths of the global financial crisis in 2009. Consumer confidence surveys meanwhile have noted a sharp deterioration.
However, as always, we must be very careful how we respond to the data. The numbers are notoriously volatile and are ‘guesses’ about the future.
Companies themselves have been rather more upbeat. Most notably, the banks have reported no changes in trend post-referendum. Likewise, the housebuilders have made a number of encouraging comments. Despite being highly nervous after the vote, management of Taylor Wimpey noted the weeks following were “better than the best hopes we could have had”. Apart from prime central London property – a niche market with issues long in the making – Taylor Wimpey management told us that activity is as strong as, or stronger than, before the referendum.
Continental European economies appear to have been unaffected by the Brexit result. At the recent G20 meeting in China, Bundesbank President Jens Weidmann commented there were “no signs yet that economic development in Europe had been affected by Britain’s decision to leave the European Union”.
It is important to remember the UK accounts for just 6% of eurozone exports – therefore the direct economic impact on companies in the eurozone is, on average, likely to be limited. Of course, averages are only averages, and we are alert to potentially more adverse impacts for individual companies.
However, there is a chance the Brexit could threaten, by a sort of contagion, the whole European ‘project’ – but for the moment there is scant parliamentary backing for referenda in other member states.
Do not underestimate the willingness of the European Central Bank and the Bank of England to ‘do whatever it takes’ – to borrow a celebrated phrase – to calm financial markets. Furthermore, the shock felt in other European capitals is likely to produce a response – this will probably include a heightened willingness to embrace reform, to contemplate easing the austerity straightjacket, perhaps to establish some kind of infrastructure fund. Such responses can all be seen in a positive light.
While clearly unsettled, however, we have great confidence in many of our European investments. In particular, there is no reason to think great growth companies – such as BiC, Essilor and Orpea – will not continue to thrive.
Stuart Mitchell is manager of the SWMC European fund