Brexit-linked volatility to have big impact on Europe funds

Added 6th June 2016

A vote by Britain in favour of leaving the European Union at the upcoming referendum on June 23 is likely to increase credit default spreads, dividend yields and volatility across Europe, according to research firm PureGroup.

Brexit-linked volatility to have big impact on Europe funds

The firm said that for European equity funds, including both European ex-UK and European including UK strategies, about 46.6% are likely to be negatively impacted if European markets fall in the wake of the vote. While 39.7% of funds will likely see a boost to performance if there is a period of higher market volatility after the vote.

“This scenario is highly likely even if the status quo prevails, as there are other risks ahead of the eurozone that could lead to an expansion in (credit) spreads,” it said.

“Notable funds who would expect to have a positive contribution to their performance during periods where credit default spreads widen are Threadneedle Pan European Focus, Nordea1 European Opportunities Fund, and M&G Pan European Fund,” the firm said.

While the precise impact of a Brexit is very difficult to predict, PureGroup acknowledged, it was possible to predict with better accuracy the likely impact on certain macro economic factors, like the outlook for credit default spreads.

Uncertainties significant

“There are significant uncertainties regardless of either decision,” it said in its analysis entitled ‘Brexit and the impact on investment funds’.

“It is true that a vote to leave will certainly have short term implications, both regional and perhaps globally. But a vote to remain may also run into significant long-term challenges if Europe does not reform,” it said

Given this, PureGroup said it believes investors should look to the near term when navigating the uncertain waters ahead, before looking ahead to the longer term.

UK fund impact

Fur UK funds, Pure Group said around 55% of UK equity funds are set to benefit positively from the rise in credit default spreads that are expected to come with an increase in short term market risks associated with Brexit.

According to the firm, 3.8% of UK equity funds will be negatively affected by wider default spreads, while 40.6% of the funds are neutral and so, relatively indifferent to any expansion in spreads.

“Notably we would expect funds like Henderson UK Alpha, L&G Growth Trust, and Fidelity UK Opportunities Fund to have a positive relative contribution to their performance during this period as they have positive sensitivities to UK default spread movement,” the firm said in its research report.

“In case of a Brexit, the direction for policy rates is uncertain as it is unclear whether the BoE would be prepared to tolerate above-target inflation and stimulate growth or hike rates to counter rising prices,” the firm said

“Over 70% of (UK) funds are likely to be neutral to changes in underlying inflation, the firm added. 

PureGroup provide forward looking analytics and technology for the investment management industry.

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About Author

Geoff Candy

Group digital editor

Geoff Candy joined Portfolio Adviser as News Editor in May 2014. He has been a financial journalist and broadcaster since 2005 and, in that time has worked in both South Africa and the Netherlands, covering everything from high street retailers and construction companies to mining and insurance.


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