With 20% of Invesco International Growth Fund’s assets currently invested in UK equities,1 we’re often asked about our opinion of the Brexit — the possible exit of the UK from the European Union (EU). While there would be negatives and positives associated with such a move, the most important thing for our investors to know is that the specter of Brexit doesn’t impact our decision-making process, which is solely focused on finding attractively valued stock in quality companies that have sustainable earnings growth potential. Moreover, we believe our current UK holdings are well-positioned no matter the result of the Brexit referendum vote on June 23.
- The fund’s UK exposure is concentrated in diversified global multinationals that we believe are not overly dependent on trade with the EU.
- The vast majority of the fund’s UK holdings have less than 25% of revenues that are exposed to the euro.
- Many of our largest UK holdings have considerable exposure to the US. Due to the weaker sterling, the conversion of earnings from US dollars may be a positive for these companies in the event of Brexit.
- Production sectors face more uncertainty than service sectors, and about 75% of the fund’s UK exposure is in companies that are service providers.
Brexit’s potential negatives and positives
I see four main positives and four main negatives of a Brexit.
- The UK could potentially face less regulation if it left the EU.
- The country would no longer have to pay contributions to the EU.
- The UK would gain the ability to negotiate new trade deals without the influence of the EU, and it could possibly arrange more favorable terms.
- The government could adopt new skills-based migration policy designed to benefit businesses.
- The UK would face possible new tariffs on exports to the EU, which is the destination for approximately half of all British exports. (On the other hand, 18% of EU exports flow to the UK.)2
- Access to the single market of the EU would potentially be lost.
- The City of London’s status as Europe’s undisputed financial center could be damaged.
- Financial markets may decline given the higher uncertainty about the effects of an independent UK.
Overall, we believe the negatives outweigh the positives, but not to the point where a Brexit would cause us concern. UK exporters would face some additional costs associated with border control, increased import duties and other activities, but it would not face any meaningful barriers to trade. In addition, these costs would likely be offset by any stimulative growth impact for those exporters who would enjoy relative pricing benefits from a potentially weaker sterling.
Despite the significant uncertainty surrounding this issue, we have high conviction in our investment process, which focuses on companies’ EQV characteristics: Earnings, Quality and Valuation. If we find companies in the UK that look attractive under our criteria, we’ll evaluate them on the basis of their fundamentals, not macroeconomic uncertainties.
Learn more about Invesco International Growth Fund.
Learn more about Brexit from Invesco Chief Economist John Greenwood.
1 As of March 31, 2016, UK equities constituted 20.44% of total net assets for Invesco International Growth Fund.
2 Source: The Economist, Feb. 24, 2016
Invesco International Growth Fund risks:
Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile.
Stocks of medium-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.
The fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the fund.
The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
All data provided by Invesco unless otherwise noted.
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Investing under the specter of Brexit by Invesco