Stock markets from Tokyo to New York have in the past few days been shaken by unrest as investors fear that the results of the British referendum will be contagious. The concern is that the political and economic upheaval caused by the vote will disrupt an already fragile global economic recovery. One particular point of uncertainty is what effect Brexit will have on other countries in the EU.
"It has been a tumultuous few days. At the same time, it has also been a time of indiscriminate declines in many markets and sectors. Volatility creates opportunities for a stock picker like SKAGEN," said Knut Gezelius, who is lead portfolio manager for SKAGEN Global, in response to the past two trading sessions.
No Euro bonus
Britain's vote to secede from the EU has so far wiped approximately USD 4 trillion off the value of global equities, according to Bloomberg. In the wake of the vote, global investors have been seeking refuge in what are perceived to be safer investments and are selling out of financial companies.
In this period of indiscriminate declines following the UK referendum, returns in two out of our five equity funds fell sharply in absolute terms. Though the effects of the vote have varied widely, the declines have been directly linked to the underlying exposure to financial companies or stocks listed in London and Europe. For the global emerging markets, the effect of the recent market turmoil has been much more muted.
SKAGEN Global has been the fund that has felt the brunt of the market forces the most due to its relatively high exposure to US and European finance. It has large holdings in American International Group (AIG) and Citigroup. At the end of May, SKAGEN Global had 24 percent of its assets invested in financial companies. In comparison, the MSCI All Country index had a weight of 21 percent in financials.
Sticking to our philosophy
"We have been somewhat overweight the financials space given our value-based philosophy which has guided us towards long-term undervalued financial institutions. In addition most of our financial holdings are among the best capitalised banks and insurance companies, so we find the short-term volatility excessive," said Gezelius.
Gezelius points out that the financial markets have a tendency to overshoot, both on the way up and down. As such, he believes that the two above-mentioned US financial institutions have been overly penalised in the past couple of days. AIG and Citigroup's direct exposure to Europe is limited. AIG gets more than two-thirds of its revenues from the US and another 13 percent from Asia/Pacific. For Citigroup, almost half the revenue stems from the US, 19 percent from Asia/Pacific and 17 percent from Latin America.
In the high concentration equity fund SKAGEN Focus, financials were also the sector that detracted the most from performance during the Brexit turmoil. The fund is still outperforming its benchmark MSCI All Country World Index by one full percentage point, however. This despite counting AIG as its largest holding. The fund's outperformance year to date stems from good stock picking in other areas such as in small caps and metals.
SKAGEN Focus also provides one of the best examples of precisely how indiscriminate the sell-off in financials has been through its holding Citizens Financial Group, which posted substantial drops in value after the vote. This makes little sense given the bank's regional US focus.
SKAGEN Vekst is the other of our equity funds that felt the market forces the most in the past few days. This is due to its Nordic/Global mandate. Given the close links between the Nordic region and the rest of Europe, all the Nordic stock exchanges followed the same route as their European counterparts in the wake of the vote. From Copenhagen to Helsinki, the markets posted large declines.
Upside-down risk perception
For the emerging markets' focused equity fund SKAGEN Kon-Tiki, the effect of the market turmoil on the fund value has been much more muted. According to a Bloomberg comment, Britain's vote has more or less flipped perceptions of global political risk on their head. European politicians will argue Brexit for years, creating a long-lasting cloud of uncertainty over the region's equity markets.
The global emerging markets seem to benefit as political wrangling and trade disputes could cause the Federal Reserve and the European Central Bank to keep their stimulus measures intact for much longer. This will benefit emerging markets where a tightening of liquidity has been a concern for some time. In addition, Brazil's new government and Russia's relative isolation are now seen as positives.
As a result, our global emerging markets fund SKAGEN Kon-Tiki weathered the gale force winds rather well. The same goes for our global property fund SKAGEN M2, which has had almost a third of its assets in emerging markets, compared with a weight of 25 percent in the MSCI Real Estate Index.
Taking a breather
At the time of writing, the international stock markets seem to be taking a breather to reassess the effects of the vote. The British pound, European stocks and commodities have posted their first gains since the shock vote was announced. Our portfolio managers are positive about their portfolios and believe returns will improve again after the turbulence that we have been through in the past few days.