FE Trustnet readers are right to maintain their exposure to UK equities despite last week’s Brexit result, according to a number of investment professionals.
In our website’s latest poll, 48 per cent of 1,446 participants said they are maintaining their UK equity exposure while more than a quarter are actually buying into the region.
In contrast, just 6 per cent are ‘dumping’ their UK funds completely, 8 per cent are trimming their exposure and 10 per cent are viewing Brexit as an opportunity to ‘snap up’ attractively-valued holdings.
The shock results from Thursday’s referendum led sterling to fall to its lowest level in more than 30 years on Friday and, according to FE Analytics, the FTSE All Share index fell 3.82 per cent.
Since then though, the index has rebounded and is now up 2.74 per cent since the start of this week while the value of sterling has steadied.
Performance of index over 1month
Source: FE Analytics
In the run-up to the referendum, many fund managers and investment professionals warned of short-to-medium term volatility in the market, but does that mean that investors should ride out the immediate market noise to reap the longer term rewards or should they remain cautious? 
Martin Bamford (pictured), managing director of Informed Choice, strongly believes that investors should maintain their exposure to UK equities following the referendum.
He said: “Any knee jerk reactions prompted by market volatility would have simply crystallised losses and caused a dilemma around the best timing to buy back in.”
“It is also positive to see a significant number of investors have been adding to their holdings. There has been a lot of scaremongering about the result but nothing has fundamentally changed with the long-term outlook for UK equities.”
“If you have the right appetite and capacity for risk, and you need to take this risk to meet your financial planning goals, then adding to your equity holdings at a time when the markets are holding a sale is a smart move.”
Tilney Bestinvest’s Jason Hollands says that the firm has a neutral weighting to UK equities overall but points out that this is biased towards liquid, large-cap stocks with high international earnings.
Performance of indices over 1month
Source: FE Analytics
“It’s important to understand that the UK equity market is very international in nature and is not a simplistic proxy for the UK economy which undoubtedly faces some headwinds from the uncertainty over our future relationship with the EU,” he explained.
“In particular, over 70 per cent of the earnings of the FTSE 100 are derived outside of the UK, typically in dollars. Not only does this provide a considerable cushion from any near to medium term deterioration in UK growth, the depreciation in sterling should actually be a positive factor as overseas earnings get translated back into sterling reported profits and dividends.”
While Hollands says the market will remain volatile until a new prime minister is chosen and their negotiating stance with the EU is clear, he points out that the large gap in yields between FTSE 100 stocks and UK gilts will also support UK equities.
Funds that he believes are well-positioned for the current environment include Hugh Yarrow’s Evenlode Income due to its focus on cash-compounding stocks and JO Hambro CM UK Opportunities for its concentrated portfolio of high-quality growth holdings.
“[The fund] also has a sizeable cash war chest to invest and, despite its weightings to small and mid-caps, Liontrust Special Situations [is well-positioned],” he continued.
“The latter has a focus on growth businesses with unique and hard to replicate characteristics such as ownership of intellectual property or recurring contractual earnings, so should prove very resilient to any economic slowdown.”
Similarly, AXA Wealth’s Adrian Lowcock says that there have been both winners and losers from the EU referendum and says that domestic-facing stocks further down the cap spectrum have unsurprisingly been hit the hardest by the announcement of a Brexit.
He says that, if investors have a genuinely long-term time horizon it is okay to adopt a relaxed approach. However, he warns that recent volatility isn’t simply a knee-jerk reaction and says that there will be continual changes and readjustments over the next few months and years.
“Drip feeding money into your favourite managers will be the most sensible approach,” he said.
“UK equity income, having suffered from a lot of cuts at the start of the year looks attractive now as some stocks offer good yields. They are also naturally defensive and many large-caps have global earnings so will benefit from the weaker pound. CF Woodford Equity Income fund is well positioned given its large exposure to tobacco and pharmaceuticals.”
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
“For the more adventurous, a mid-cap fund such as Franklin UK Mid Cap is an option but I would absolutely drip feed here as there is the possibility of further falls. Paul Spencer has a great track record and runs a concentrated portfolio and looks for companies in robust financial health but will invest in growth, value and recovery stocks.”
Richard Philbin, chief investment officer at Wellian Investment Solutions, says that investors should bear in mind that most of the movement over the last few days has been in the currency market as opposed to the equity market and points out that the FTSE 100 is now higher than it was before the referendum.
While he says that sterling investors have been well-insulated, he admits that UK small and mid-caps have been hurt but argues that this has led some valuation anomalies to emerge in the market area.
“The nimble fund manager (who has liquidity and access to stock liquidity as well) probably has a lot of ideas at the moment,” he said.
“Large-cap stocks are likely to benefit from a weak sterling – after all, somewhere between 70 per cent and 80 per cent of their revenues are generated outside of the UK, so a 10 per cent or so fall in their prices relative to the US and the euro actually makes UK-based international companies products incredibly attractive.”
“There will be weak spots though – real estate/housebuilders/construction, financials and retailers for instance and there is potential for the UK to shrink into recession. There is also the possibility of inflation around the corner too as import prices for goods from Europe (our major trading partner) and the US are now about 10 per cent higher than they were last week.”
