08.31.2016
By Shanny Basar

U.S. Buy Side Split on ‘Brexit’

Just over half, 51%, of North American fund managers said the UK vote to leave the European Union had not affected their investment decisions, while 49% have made changes since the referendum in June.

The perception analytics team at data provider Ipreo interviewed nearly 45 major buy-side investment firms mostly in the United States, and to a lesser extent Canada, in late July and early August before the Bank of England announced the extension of its quantitative easing program.

Respondents who did not change their investments after the Brexit vote said it is still too early to understand the long-term implications of the vote but do not think it will have substantial long-term impacts on the economies of the EU. One manager in the survey said: “We do not know, nor does anyone else know, what the long-term implications will be stemming from the vote. There are a lot of contracts and other things that will have to be worked out, but we are here to identify the best businesses, not play the macro stuff. We will not avoid regions or rebalance our portfolio around an event where there is so much still unknown.”

In contrast, respondents who did change their investments said the vote increases the risks of other countries leaving the EU and of a global economic slowdown. One manager in the report said: “The vote creates a lot of uncertainty in the minds of businesses, especially the ones exposed to the European markets. If you are facing an uncertain environment, you tend to hold back on whatever investments you are making. For me, the first thing I did was look at the companies with European exposure in my portfolio and, for better or worse, I decided to pare back those positions. “

Nearly three-quarters, 71% of respondents, expect the financial sector to be most affected by Brexit because of the decrease in interest rates and increased currency volatility. Over the long-term there is uncertainty over whether the UK will remain a the largest financial centre in the region and whether funding from the UK and Europe across global markets will be reduced.

“The value dislocation caused by Brexit could present an opportunity for these potential investors to initiate a position,” added Ipreo. “However, the bottom-up, stock-specific opportunity could be trumped by a top-down allocation decision to move assets out of a region or a sector. These macro considerations are more important post-Brexit than ever in recent memory, particularly for UK and European companies.”

The Ipreo corporate analytics team analysed changes in ownership information sourced from the share registers of a majority of the component companies in the FTSE 100 and FTSE 250 just before and after the Brexit vote and found that selling was widespread for both sets of companies.

“Investors based in continental Europe and the UK & Ireland were bigger net sellers on a percentage basis than their North American counterparts,” added Ipreo.

Theresa May, who became the UK prime minister after the Brexit vote, said today that the government will not trigger Article 50, required to leave the EU, until 2017 at the earliest. Negotiations on the terms of the exit have to be agreed within two years of the trigger.

Thomas J Reid. managing partner of law firm Davis Polk & Wardwell, said in a blog today on the Harvard Law School Forum on Corporate Governance and Financial Regulation that no substantial progress has been made towards finalising Britain’s objectives in the Brexit negotiations but that some picture of a plausible UK negotiating position might begin to emerge now that the summer break is over. His piece included the possible impact of Brexit on credit rating agencies.

He wrote that it is possible that credit rating work will be shifted out of the UK and into the EU following Brexit as most of the ratings agencies ‘ EU activities are performed by their UK subsidiaries.

“This will, at least in part, depend on the viability of the alternative mechanisms,” added Reid. “It will also depend on whether the intensive supervisory regime established by the CRA Regulation will be replicated in UK law, with the FCA replacing Esma as the relevant regulator.”

He continued that CRA Regulation contains mechanisms for the regulation of third country CRAs, but it is unclear whether these will be sufficient to allow UK-established CRAs to continue to operate in the same way as they do today.

“Given the political hostility to CRAs in some parts of the EU, we expect significant pressure to be applied to CRAs to move the bulk of their EU business from the UK and into the EU, where the intensive Esma supervisory regime can be applied,” said Reid.

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