Update on Brexit Vote

240616 Market Commentary

Update on Brexit Vote

After the recent Remain-leaning polls and subsequent risk rally, the UK’s vote to leave is a nasty shock. From a political point of view, this “out” vote puts EU foundations at risk with a potential contagion effect as we are currently evidencing throughout Europe a gain in strength of populist anti-establishment movements all having one common denominator: they are notoriously anti-European. From an economic perspective, outlook is uncertain as the UK economy will probably suffer as previously highlighted by most of market commentators. With no surprise, financial markets are reacting in an aggressive way. This negative trend should continue over the coming days. As an illustration, the Japanese Market closed down 8% this morning, FTSE 100 was down 5% and MSCI Europe was down 7% at 10:00 am. Quite logically, Financials (mainly Banks) are hit hardest. Currencies are dramatically affected with the GBP loosing 7% against the USD and the Euro loosing 2%. Crude is losing 4%. At the opposite, perceived safe heavens are up with Gold price up 4% and government bond prices shooting upwards. Our portfolio is not immune and is negatively affected; however, we want to highlight the following
  • Our portfolio is positioned in a more defensive way than the overall market with only 14% in Financials (vs. 20% for the MSCI Europe) and no exposure to UK Banks
  • We only have 5 UK companies in portfolio (mainly global companies) representing 12% of the portfolio compared to 30% for the overall European market
As bottom-up long-term investors, we strongly believe that, while over the short- to medium-term this event is clearly affecting the operating environment of European companies and creates painful volatility, over the long-term the success of our investment strategy remains only dependent on 2 factors:  
  1. firstly, the earning power the companies are able to produce and
  2. secondly, the price at which we invest into these cash-flow generating franchises.
  Over the last 15 years, our investment team has consistently applied this investment philosophy founded on undervalued earning power which has demonstrated its value added under different difficult market configurations (burst of the Internet Bubble, 9/11, the big crisis of 2008-2009 and the Eurozone crisis). In tough times, we think it is crucial to stick to our guns and use the opportunity to look for investment opportunities forced sellers may present to us. This is how we will be able to produce superior long-term returns. Our agenda remains thus unchanged: build a concentrated portfolio of 30 to 40 European companies offering undervalued earnings power.   Last but not least, let’s have a look at our hedged strategy. Prior to the poll, in order to take our precautions, we decided to take a more conservative stance than the one suggested by our model by lowering the net exposure which is now at 20%. We are confident that, in this challenging context, our hedged strategy will have the ability to act as a buffer, proving again its ability to protect capital on the downside.