Ahead of the outcome of the Brexit negotiations, Square Mile are reviewing UK equity options in our Managed Portfolio Service and considering funds sensitivity to the potential outcomes.

Accordingly, we surveyed the managers of the 48 UK equity funds with a Square Mile fund rating (an indication of the best fund managers in the sector) to investigate their opinions of how Brexit might impact the market and their portfolios. The questions and responses are as follows:

Please would the lead fund manager on the fund provide a view on the following:

1. Re the performance of FTSE All Share index over the next 12 months, which would be the most favourable outcome of the Brexit negotiations:
i) Hard Brexit 10%
ii) Soft Brexit (retaining an association with the EU customs union and single market) 39%
iii) Doesn't matter 13%
iv) Don't know/impossible to determine 39%

2. Compared to the performance of the FTSE All Share, do you estimate that your portfolio is:
i) Very sensitive to outcome of Brexit negotiations 0%
ii) Sensitive to outcome of Brexit negotiations 42%
iii) Broadly unaffected by outcome of Brexit negotiations 27%
iv) Impossible to determine with any meaningful accuracy 32%

And if your answer is i) or ii), which outcome would be most favourable to the relative performance of your portfolio:

i) Hard Brexit 15%
ii) Soft Brexit 85%

[The survey was sent to 39 fund managers/fund management teams at the end of July and 31 responses were received over August 2018.]

Clearly the variety of responses underlines quite how complex this issue is and how uncertain the outcome will be. Markets have had two years to consider the impact of Brexit and the valuation of many stocks discount the worst case scenario so the impact may be more muted than in 2016. While many managers expressed a view that a soft Brexit would be the most favourable outcome, this is clouded by sterling’s reaction on the foreign exchange markets. Sterling is expected to depreciate in the event of a hard scenario and this would boost the value of revenue from overseas. With around 70% of FTSE 100 sourced from overseas this could have an offsetting impact (as was seen on the announcement of the referendum result).

There is of course a third potential outcome to the Brexit negotiations, and that is there is no Brexit. This could be a risk to many funds relative positioning and a reversal of the market moves in June 2016 seem a realistic outcome.