Institutional investors change UK exposure post-Brexit

In June 2016 the UK voted to leave the European Union, and institutional investors have begun to adjust their exposure to British companies. This leaves UK investor relations teams with the difficult task of finding the appropriate messages to convey to investors, according to a report by Nasdaq Corporate Solutions.

Over the past few months, markets have been volatile as institutional investors – which were surprised by the Brexit vote – have begun adjusting their portfolios.

But while UK investors have taken a pessimistic approach, it hasn’t been all bad news because a number of US investors have been bullish toward large-cap UK companies, according to the report. These investors are taking advantage of a currency play that started when sterling plummeted 9 percent following the vote, according to Alexander Free, an analyst with Nasdaq Corporate Solutions’ advisory services unit.

‘The UK remains a very attractive prospect for investors looking for a bargain,’ says Free in an interview. ‘IR teams can highlight the attractiveness of UK firms, supported by the lower pound, and for those with a UK-focus, IROs can also look to bring forward the relatively positive economic data the UK has seen since the Leave vote so far.’

Size matters

Surprisingly, UK small and mid-caps have been somewhat resilient to the effects of Brexit. Prior to the vote, market commentators had suggested these companies were the most at risk as they tend to have more UK-denominated revenues. But trading activity across the market caps has been largely consistent.

Looking ahead, however, smaller-cap companies may become more at risk as the full implications of Brexit are discussed among politicians. Free suggests IR teams ‘emphasize the positive economic data in the UK. For exporters, they should also highlight how a weaker pound will support sales overseas.’ 

In general, IROs should keep an eye on growth investors, which are likely to be the quickest to jump ship if the UK’s economic situation starts diminishing, Free notes. That said, value investors are ‘likely to have a different stance, potentially looking for market overreactions, and further opportunities to spot a bargain,’ he adds. 

 Sovereign funds quick to move

At the moment, sovereign wealth funds (SWFs) have been particularly active, the report shows. Free says this is because SWFs have a more centralized decision-making system in place. ‘They tend to move more strategically across the board,’ he explains. ‘For example, Norges Bank Investment Management announced ahead of the vote that it would continue buying in the UK even if there were to be an out-vote.’

Fund houses, meanwhile, have been slower to react, which Free says is likely due to the range of funds and fund managers, who may hold different views on UK companies.

The study shows the trends up to June 30. Free says a lot of the future movements of institutional investors will depend on the economic data released by the UK in the coming months and how smoothly the country can depart the union, if and when Article 50 is triggered.