1st August 2016
The UK’s exit from the European Union is not a crisis event on the scale of the credit crunch of 2008, and will likely have only a “moderate” impact on European growth expectations argues Kames Capital’s Global Equity Income co-manager Douglas Scott.
Scott says while Brexit has sparked volatility across UK equity markets, the health of UK plc and the likelihood of further stimulus from the Bank of England should prevent a repeat of the slowdown sparked by the credit crisis.
“The UK’s EU referendum and ensuing political vacuum has created an elevated level of uncertainty and volatility within the UK market, and from a macro perspective the UK economy is likely to slow over coming quarters as a result of Brexit induced uncertainty,” the Scott says.
“However, expected proactive stimulus measures by the government and Bank of England, combined with the strong balance sheets of the corporate sector, means that we believe the comparison of this slowdown with that experienced in 2008/9 is unfounded.”
Concerns have been mounting about the health of the UK economy post-Brexit, with recent data showing a sharp drop off in economic activity. Last week, the Purchasing Managers Index for the UK’s services sector – a key driver of the economy – fell from 52.3 in June, to 47.4 in July. Any reading below 50 indicates a recession is likely.
However, while the headlines appear bleak, Scott does not expect the UK or Europe to enter a sharp downturn as a result of Brexit.
“Other than a moderate reduction in European growth expectations, we do not expect a material impact on the global economy,” the managers said.
“However, we think policy makers will continue to err on the side of caution, reinforcing our central view of an ongoing low growth environment where interest rates and bond yields remain anchored ‘lower for longer’.”
In this environment, the fund’s investment strategy is to focus on businesses that can deliver dividend surprises or have the ability to grow regardless of the macro backdrop.
“The indiscriminate re-rating of overseas exposed companies, and the accompanying sell-off in UK domestics and financials, should create a range of interesting anomalies and opportunities to accumulate positions for the longer term,” they said.