Invesco Canada blog

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Matt Peden | June 15, 2016

What will the impact of a “Brexit” be on European equities?

As “Brexit” dominates news reports and media commentary, there has been a significant sell-off in both U.K. and European equities ahead of the U.K.’s referendum on its continued EU membership. In addition, there has been significant depreciation of the pound. Despite this volatility leading up to the vote, I believe that either outcome will ultimately have little impact on the U.K. economy over the long term.

Despite notable benefits associated with EU membership, including pre-existing internal and external trade agreements, there are also negative elements associated with membership, arising from the bureaucratic and non-capitalist-oriented nature of the union, as evidenced by the poor handling of the sovereign debt and migrant crises.

Regardless of the outcome of the vote, we believe the U.K. can be successful in the long-term, as the country has a well-structured, market-based economy that is home to many leading businesses, an innovative and talented workforce, strong rule of law and business-friendly tax policies. Further, in the event of a leave decision, we believe the EU would be under considerable pressure to negotiate trade agreements comparable to those that exist now, as the U.K. is one of the EU’s largest trading partners and vital to the eurozone’s struggling economy.

Overall, we believe that market turbulence and currency volatility may coincide with the referendum, but the long-term impact to the U.K. economy will likely be negligible regardless of the decision. A leave vote could be more problematic for the long-term state of the EU, particularly if the U.K. exits and is successful. In this case, other countries may question whether the benefits associated with membership outweigh the negative aspects, and opt to follow the U.K.’s course of action, which could lead to a gradual unraveling of the union.

I can by no means predict what the remainder of 2016 will bring in European equity markets, but, as always, will continue to manage Trimark Europlus Fund in the same way we have over the past six years, whatever the vote may bring – concentrating on owning high-quality companies in Europe that generate ample free cash flow, earn high returns on capital, benefit from strong organic growth drivers and are protected by a sustainable competitive advantage.

The “Brexit” vote does not change our approach, and we remain focused on seeking out any opportunities that may arise from the temporary volatility that the uncertainty creates.

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