Stuart Mitchell says the long-term case for investing in Europe remains strong despite the referendum vote.
It was not the result we wanted. Nor was it the one we expected. Nonetheless, we feel it would be quite wrong to respond to the referendum result by trying to recast our investment stance. This is because we see its implications as less severe than might be expected, and the changes that will come about will take far longer to work through than many commentators think. If ever there was a time to keep calm and carry on, this is it.
Of course, it is more than likely that the UK economy will, in the short term, grow at a slower rate than had been expected. But not necessarily by very much. The buffering impact on activity supplied by the quick post-referendum downward adjustment in the level of sterling should not be underestimated. At worst, we think growth could be flat by the start of next year; more likely, it will still be mildly positive.
Another reason to be wary of making big and quick changes is that the majority of our portfolio is made up of great, super-quality growth companies based in Europe. Just 7% of Europe’s exports go to the UK, and these companies will be even less affected by any softening in the UK than this already-low figure implies. Thinking longer-term, it remains an observable fact that Europe has more than its fair share of great companies. These are often companies with great technologies and a vibrant culture of innovation, well capable of participating in global markets which continue to grow, markets which are wholly unaffected by Brexit and its fallout. They include companies such as SAP, Essilor, Amadeus and Assa Abloy – all present in the portfolio.
We do hold, in the Greater European Progressive portfolio, a small number of UK-orientated companies, including a couple of UK housebuilders and Lloyds Bank. It would be foolish to think that these can be wholly unaffected by recent – and future – events. But with the economy staying out of recession, as we think it will, the impact will be limited. Lloyds, in particular, is an interesting case – slower credit demand and a rise in non-performing loans will, naturally, not be helpful, but it remains one of the world’s best-capitalised banks. We have regarded it as being incorrectly valued for some time now, and we still do. It deserves to be more highly rated.
We have been spending time talking with politicians and negotiators from the European Commission and sources close to the German government. While the outlines of an exit agreement are as yet very unclear (and will remain so for a good while), it is well-recognised that it would serve no-one on either side to put up trade barriers. The UK is an important market for larger multinationals such as Essilor and Volkswagen, and they want to be able to sell into the UK. Such a benign outcome cannot, of course, be taken for granted, but we doubt that we are wrong on this, even if – once more – it takes time for us to be proven right.
We will carry on doing what we have been doing for the past 30 years – going on the road to visit companies, carrying out diligent research and trying to find new and interesting investment ideas. Our experience of these past three decades – which has included the invasion of Kuwait, the second Gulf War, the dotcom crash and the great financial crisis of 2007 – is that there is opportunity to be found amid chaos. The opportunity to make money for our investors has not gone away.
Stuart Mitchell of S. W. Mitchell Capital is the manager of the St. James’s Place Continental European fund and co-manager of the St. James’s Place Greater European Progressive fund. The opinions expressed are those of Stuart Mitchell and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.
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