Key findings:
• Approximately 17% of the revenue of UK listed companies in 2015 was derived from the EU equivalent to £350bn (32% came from the UK)
• The sectors with the largest EU exposure are Telecoms (37.3%), IT (22.4%) and Consumer Discretionary (21.9%). Pension funds/instutional investors with large exposure to these sectors (either directly or via UK, European or Global Funds) should assess whether the potential volatility in those firms’ future revenues post an “out” vote would significantly alter the risk profile of their overall portfolio.
• Several of the largest companies with EU or "rest of world" earnings far outweighing their UK revenues, are major components of UK equity funds, Index trackers and income funds and, in some cases, significant contributors to those funds' performance. In the short term, asset owners need to understand the potential for portfolio volatility as a result of their exposure to these companies and also be mindful of the scenario that, should a small number of large companies redomicile as a result of an EU exit, either for trade purposes or to be nearer the markets from which they derive their revenues, portfolios and risk exposures have the potential to change significantly. This needs to be factored in by fund managers and pension funds.
• Short term, should UK GDP weaken substantially during any post Brexit transition period, the impact on smaller capitalisation companies could be significant their relative lower level of international diversification. Longer term, the “leave” perspective should benefit more domestically oriented companies, which should stand to benefit from any renewed domestic economic strength whilst, also long term, the “In” perspective should benefit larger companies at the margin, given their more significant exposure to EU markets.
This new report builds on an earlier study of asset allocation entitled the Allocation Illusion released in 2015.
Olivier Lebleu, Head of International Business at Old Mutual Asset Management, said: “Institutional investors and pension funds ought to be aware that, were a small number of large companies to redomicile as a result of an EU exit, either for trade purposes or to be nearer the markets from which they derive their revenues, portfolios and risk exposures have the potential to change significantly. Several of the largest companies with EU or "rest of world" earnings far outweighing their UK revenues, are major components of UK equity funds, Index trackers and income funds and, in some cases, significant contributors to those funds' performance.
“Shorter term, asset owners should fully understand their exposure to those sectors whose earnings would be most exposed in the event of a Brexit. Pension funds which are heavily exposed - directly or via UK, European and Global funds – to sectors such telecoms, information technology and consumer discretionary, which are the most exposed to the EU, should assess whether the potential volatility in those firms’ future revenues post an “out” vote would significantly alter the risk profile of their overall portfolio.”
To download the report “Brexit, an Analysis of Economic Exposure” click here
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