New York-When the British voted in a referendum to leave the European Union, it clouded the political outlook across the region, and that made the economic and investment outlook far murkier, too.
It’s still too early to tell, even three months after the vote, how much of an impact the so-called Brexit is likely to have on economic and business conditions, investment advisers say. Calm has been restored, they acknowledge, but they warn that long-term risks remain in Europe, Britain most of all, for businesses and therefore for investors, too.
The investment outlook is “a lot less favorable” in Britain, said Alan Mudie, head of investment strategy at Societe Generale Private Banking Hambros. Until companies have clarity about their longer-term relationship with the European Union, they will delay investments, he said. “It doesn’t make sense not to, until they know what sort of marketplace they’re going to be operating in.”
Sarah Ketterer, manager of the Causeway International Value fund, agreed that “from an investment perspective, everything is delayed.” As a result, she said she was “making very conservative assumptions” about conditions in Britain, and she predicted a mild recession in 2017.
She is not alone, and Britain may not be, either, when it comes to the consequences of Brexit. The British bank Barclays warned that Brexit is likely to create substantial headwinds for economies in Britain and on the Continent in coming months.
Highlighting surveys showing that corporations’ plans to invest declined markedly and that consumer confidence had eroded, Barclays forecast that the British economy would be pushed into a recession imminently.
As for Europe over all, “we expect growth to slow further towards year-end, as Brexit weighs on confidence, private consumption and investment,” the bank said in an economics report in August. Reaction to the vote in regional economic and confidence data had been muted, the report said. But: “Most forward-looking components showed that expectations had resumed their downward trend, and we expect confidence to be further affected in the months to come. Uncertainty is likely to weigh on investment, with a negative feedback loop on the labor market and private consumption.”
The initial reaction to the Brexit vote was much starker. Many people assumed that Brexit would be awful for the country, the region and beyond. The result was plunging stock markets and currencies almost everywhere.
The MSCI Europe index fell 13 percent in the two trading days after the June 23 referendum, and the MSCI index of British stocks fell 15.7 percent. The indexes are calculated in dollars, so those figures incorporate the declines in stocks and also in the euro and the pound against the dollar.
Within a week, both indexes had recovered more than half of the losses, although it is unclear why. A new British prime minister had taken over and pledged to honor the decision to leave the 28-nation bloc, but everything else related to Britain’s departure was still up in the air. The outlook had not changed, only the public’s feelings about it.
Markets in the region have stabilized, helping investors who hung on for the wild ride. Funds that specialize in European stocks rose 5.3 percent in the third quarter, according to Morningstar.
But where investors, and businesses, go from here is much less certain.
What makes the post-referendum outlook especially hard to gauge for businesses is that Britain has yet to make clear how it intends to honor the result. A report by Brewin Dolphin, a British wealth management firm, suggested that the new government of Prime Minister Theresa May would have to thread a very slender needle as it tries to keep the country in the single European market for goods and services while imposing limits on immigration.
How it will go about accomplishing that could become clearer next spring. Mrs. May said earlier this month that Britain would invoke Article 50 in March. That is a European Union treaty provision that governs the process for a country to leave the union.
Evidence of the concern among businesses can be found in a Bank of England survey taken just after the vote. It reported that “companies indicated the result of the E.U. referendum would have a negative effect, overall, on capital spending, hiring and turnover over the coming year.” It added that “employment and investment intentions had weakened in absolute terms, pointing to expectations of little change in staff numbers and capital spending over the coming six to 12 months.”
James Hunt, manager of the Tocqueville International Value fund, is willing to give the economy and stocks in Britain and the rest of Europe some benefit of doubt when it comes to Britain’s departure from the European Union, if and when it occurs.
“The market reaction is overdone,” Mr. Hunt said. “Brexit may not happen. There are plenty of ways the U.K. government can cause it not to happen” through what it asks for, and when, in its negotiations with the union.
If Brexit goes ahead, “there will be a moderate impact on the U.K. initially and then I think they could end up in a better place,” he said. “There will be a smaller impact on the European economy, and what I hope is that it’s another incentive for Europe to accelerate whatever structural reforms they have going.”
Some businesses and investors in Europe have waited — and hoped — for many years for government initiatives to reduce regulatory hurdles and to make labor cheaper and employment more flexible, which would improve competitiveness and economic growth.
The prospect of Britain leaving the European Union could concentrate the minds of political leaders, but Ms. Ketterer said many large companies are tired of hanging around and are undertaking changes of their own. That fact tends to get lost amid the apprehension over factors such as Brexit, creating what she sees as solid investment opportunities, particularly in large, European, multinational companies in economically fragile sectors.
“We might have to wait awhile for governments to restructure, but these companies aren’t waiting,” she said. “We really like these globally competitive, cyclical companies. They are really well managed and cheaper” than shares of equivalent American companies.
The preference for large British companies that make money abroad is widespread. Mr. Hunt likes the beverage purveyor Diageo, for instance. Its “cash flows are global, and the perceived connection to the U.K. is greater than it really is,” he said.
A globally diversified revenue stream should inoculate such companies against weakness in the pound, a development that provides British exporters with a substantial competitive advantage over their peers elsewhere by making British goods and services cheaper to foreign customers, Mr. Mudie of Societe Generale pointed out. That is a prime reason that he also favors large British companies.
Within the eurozone, he recommends health care and consumer sectors. Consumer stocks should benefit from a continuing decline in unemployment and improved access to bank credit, he said. Considering the markets more broadly, he anticipates American stocks outperforming their European peers, with British stocks doing better than ones on the Continent.
Ms. Ketterer said she is taking a chance on British financial companies. A post-Brexit reduction in interest rates by the Bank of England hit their stocks especially hard; banks’ profits depend on the spread between rates at which they borrow and lend, which is squeezed when rates fall, and insurance companies’ profits depend on the income paid on the bonds in which they invest their policyholders’ premiums. But the decline in bank and insurance stocks has been so severe, in her view, that they warrant a bet.
Ms. Ketterer likes the British insurance companies Prudential and Aviva. Among British multinationals, she said the energy company Shell is appealing for its high yet secure dividend yield of close to 7 percent.
But how big a bargain any European stock is may not become clear until the uncertainty surrounding Brexit abates. As Ms. Ketterer reminds investors, that could take a while.
“The initial shock has worn off” since the referendum, she said. But “in the U.K. nothing has been settled. There’s a very long road ahead.”
The New York Times