With about 25% of the assets in Invesco International Growth Class (the “Fund”) currently invested in U.K. equities,1 we’re often asked about our opinion of the Brexit – the possible exit of the U.K. from the European Union (EU). While there would be negatives and positives associated with such a move, the most important thing for our investors to know is that the spectre of a Brexit doesn’t impact our decision-making process, which is solely focused on finding attractively valued stock in quality companies that have sustainable earnings growth potential. Moreover, we believe our current U.K. holdings are well-positioned no matter the result of the Brexit referendum vote on June 23.
- The Fund’s U.K. exposure is concentrated in diversified global multinationals that we believe are not overly dependent on trade with the EU
- The vast majority of the Fund’s U.K. holdings have less than 25% of revenues that are exposed to the euro
- Many of our largest U.K. holdings have considerable exposure to the U.S. Due to the weaker pound sterling, the conversion of earnings from U.S. dollars may be a positive for these companies in the event of a Brexit
Production sectors face more uncertainty than service sectors, and about 75% of the Fund’s U.K. exposure is in companies that are service providers
The Brexit’s potential negatives and positives
I see four main positives and four main negatives of a Brexit.
- The U.K. could potentially face less regulation if it left the EU
- The country would no longer have to pay contributions to the EU
- The U.K. would gain the ability to negotiate new trade deals without the influence of the EU and could possibly arrange more favourable terms
- The government could adopt new skills-based immigration policy designed to benefit businesses
- The U.K. would face possible new tariffs on exports to the EU, which is the destination for approximately half of all British exports. (On the other hand, about 18% of EU exports flow to the U.K.)2
- Access to the single market of the EU would potentially be lost
- London’s status as Europe’s undisputed financial centre could be damaged
- Financial markets may decline given the higher uncertainty about the effects of an independent U.K.
If there is a Brexit, we believe U.K. exporters would face some additional costs associated with border control, increased import duties and other activities, but they would not face any meaningful barriers to trade. In addition, these costs would likely be offset by any stimulative growth impact for those exporters who would enjoy relative pricing benefits from a potentially weaker sterling.
Despite the significant uncertainty surrounding this issue, we have high conviction in our investment process, which focuses on companies’ EQV characteristics: Earnings, Quality and Valuation. If we find companies in the U.K. that look attractive under our criteria, we’ll evaluate them on the basis of their fundamentals, not macroeconomic uncertainties.