The biggest headwind hanging over UK investors as we approach the New Year is the EU referendum, according to Lazard’s Alan Custis (pictured). 
The manager, who is head of UK equities at the group and co-manages the Lazard UK Omega and Lazard Multicap UK Income funds, is surprised that there hasn’t been more research and commentary based on the impact that a ‘Brexit’ could have on the market.
There have been a series of macroeconomic headwinds this year including China’s slowdown, the collapse in commodity prices and the impending rates hikes from the Fed, and the manager warns that these could be overshadowing a concern that’s far closer to home.
Performance of indices in 2015
Source: FE Analytics
While many UK investors have flocked to smaller, domestic-facing companies to shelter their portfolios from global storms, Custis says that the referendum could completely reverse their current ‘safe haven’ reputation.
“If you think about the Scottish referendum as our nearest point of reference in a way, what happened during that vote was that the companies with exposure to Scotland performed poorly,” he said.
“Does that mean, and this is a rhetorical question, that UK domestic companies may be perceived to be in a weaker position than the more international companies? I don’t know and I think that circles back to the point surrounding whether you should be favouring large, small or mid-caps.”
In an article published earlier this year, the manager told FE Trustnet he was rebalancing his portfolio in favour of UK blue-chips due to cheaper valuations and attractive dividend yields.
Now though, he says that there is more uncertainty than ever as to whereabouts on the market cap spectrum a UK investor will be rendered safest.
“The Brexit debate may become very much a live debate soon as we could have a vote in June,” Custis continued.
“Then, one picture you could paint is that investors should stay quite international to hedge their bets rather than going domestic and that would obviously mean going into large-caps, if this were to be the consensus view that investors take.”
“I think that’s something we need to be on top of as we move into 2016 in terms of who will be the big winners and losers from that, which is not clear at this stage.”
The manager adds that the impact of the Scottish referendum is likely to be small in comparison to the impending EU referendum, and he believes that it will cause more volatility than May’s general election which saw the FTSE 100 fall by 132 basis points in one week.
Performance of indices 1week before election
Source: FE Analytics
Laura Somers-Edgar, client portfolio manager at Lazard, agrees that significant change is underfoot and that the UK markets are likely to be hit by nerves as the referendum draws closer.
“It’s difficult because people tend to see the UK as generally immune to geopolitical risk because it’s not the nature of the market or the economy, and politics is not a huge risk in that regard,” she explained.
“I think that makes the experience much more difficult for the market to gauge.”
If, hypothetically, the UK was to leave the eurozone, both Custis and Somers-Edgar remain unsure as to how they would reposition portfolios, as it would depend on the reactions of individual companies.
Going from experiences of European countries that have left the EU, however, they believe that leaving the EU could have a detrimental impact on trade relations without reducing the UK’s costs.
Custis adds that it is an overarching fallacy that, if the UK we to leave the EU, it would be completely ring-fenced and that it wouldn’t have to contribute. Instead, he says it would be more challenging to form bilateral agreements with other countries and it could, adversely, lead to an increase in costs for the UK government.
“From a stock selection standpoint I think it’s difficult to judge at this stage, and I think what we might find is that the market says UK domestic companies are potentially vulnerable or large-caps may be vulnerable because of having to renegotiate relationships, it could go either way at the moment,” he said.
“With the Scottish referendum it was all the very micro-focused companies that seemed to get penalised, but we shall see.”
Over the last three, five and 10 years, the four FE Crown-rated Lazard UK Omega fund has been in the top quartile for its total returns.
Source: FE Analytics
The £73m fund has a clean ongoing charges figure of 0.96 per cent.
