A British vote in favour of leaving the EU next month will have a “significant” impact on the revenues generated by the UK’s largest companies, potentially damaging investor returns in the process.
UK-listed companies collectively generated £350bn of revenues from the EU last year, and these revenues could be put at risk by a British exit or “Brexit”, according to research by Old Mutual Asset Management, the $218bn institutional investment manager.
The US-listed asset manager, which is majority owned by Old Mutual, the Anglo-South African insurer, said certain sectors were more vulnerable than others. Telecoms, information technology and consumer discretionary companies derive the highest proportions of revenues from continental Europe.
These companies would probably benefit most from a vote to remain when the UK goes to the polls in June.
Olivier Lebleu, head of international business at Omam, said investors need to be aware that many UK companies generate large chunks of their revenues from the EU.
“There is a gap between what [investors] think they are invested in — which is UK plc — and where these companies actually do their business,” he said.
British pension funds are heavily exposed to UK equities, with more than 40 per cent of the assets in the country’s defined contribution funds invested in domestic companies, according to Omam.
Mr Lebleu said: “If you are of the opinion that Brexit could happen and its affect would be negative, you should probably take a close look at your holdings.”
Global fund managers have already taken steps to mitigate the risk of a Brexit on their holdings.
Fund allocations to UK equities have dropped to their lowest levels since November 2008, according to Bank of America Merrill Lynch. They fell 16 percentage points in May compared with April.
However, some big investors believe UK equities now look attractive, because uncertainty around Brexit has improved the valuation of British stocks in recent months.
NN Investment Partners, the Dutch fund house, said the average dividend yield of a UK stock is now around 4.5 per cent, well above the long-term average of 3.5 per cent.
“Although uncertainty remains until the vote has passed on June 23, adding UK stocks to a European equity-dividend portfolio makes sense already today,” said Manu Vandenbulck, a senior portfolio manager at NNIP.
Omam’s report said listed companies that have a strong domestic focus are likely to benefit most from a UK exit from the EU in the longer term, although they could be harder hit than their more globally focused counterparts in the shorter term.
The report, which used figures from MSCI, the data provider, also suggested that some UK companies might move their headquarters and list in other parts of the EU in the event of an Out vote, which would have a “significant potential impact” on investors.
SOURCE: Attracta Mooney – Financial Times
