08 July 2016

Following the UK’s vote in favour of leaving the European Union, three senior members of BlackRock’s European equities team held a call on 30th June for clients offering their outlook expectations.

Nigel Bolton, co-portfolio manager of BlackRock’s core pan-European strategies and head of European equities

‘This is not another Lehman Brothers moment’

In our view, this is not the end of the world. Much of the recent press coverage has been somewhat overblown and we think it is important to remember this is not another Lehman moment: this was a planned event. It may not have been the outcome the market was expecting – nor was it our core scenario – but it was planned.

We do, however, expect growth will be slower in the UK especially, but also in continental Europe over the next 18 months to two years during this period of uncertainty.

So, how have we reacted to this event? In our pan-European portfolios we have been overweight UK companies as a whole, but with a strong bias towards international rather than domestically oriented stocks, and that will remain our focus.

We have not made significant changes to the portfolio in the last few days, but we expect the auto sector and consumer sector to face a short-term challenge, and we are cautious over capex as companies will likely put off making any big spending decisions against a backdrop of such uncertainty.

Alister Hibbert, portfolio manager of the BlackRock Euro ex-UK strategy

‘I don’t think people’s worst fears will be realised’

I’ve often said that this feels like the least fun bull market in history and I have felt relatively downbeat for some time against five years of earnings downgrades and a slowdown in European profitability.

Aside from the one-day outcome, my portfolio has been relatively well positioned to deal with the impact of the Brexit vote. As at 29 June, we have a beta of around 0.9 across our continental European portfolio, and while we had a few UK domestic holdings, we took the precaution of hedging that sterling exposure into Swiss francs to provide protection from sterling volatility in the event of an exit vote.

We have long held the view that rates will be lower for longer and were already underweight banks, which have been the hardest hit so far. Despite this defensiveness, I feel more optimistic than many others about the outlook for Europe.

Given an environment of muted growth, the Europe ex-UK economies will not suffer much as a result of Brexit. I don’t think people’s worst fears will be realised. We may see a slowdown in the sales of cars or white goods, for example, but I cannot foresee a recession.

Andreas Zoellinger, co-portfolio manager of the Blackrock Eurozone and Income strategies

‘We will not get carried away chasing higher yields’

In this uncertain environment, we feel stock picking is more important than ever and our ability to move quite away from the benchmark at times can be helpful, such as our decision to hold no autos and to be very underweight banks. The main challenge we face at the moment in the strategy is the lack of high-yielding, low-volatility stocks we can find.

We are trying not to get too carried away when seeking high yield: we are comfortable with our telecoms names, infrastructure, such as motorways, utilities – in the more regulated areas, and tobacco. Real estate also remains a key overweight for us.

At a portfolio level, as at the end of May, we had a 12m trailing net dividend yield around 4% and expect solid mid-single digit dividend growth. In our eurozone strategy, we expect the impact of the ‘Brexit’ vote to be indirect in that it might suffer through a dip in sentiment from both consumer and business spheres.

Closing remarks: Nigel Bolton: “We buy companies, not countries”

These volatile markets provide opportunities for people who truly understand the companies in which they invest. We believe this is a year for active investing- with a great team, great process and some great stock selection ideas coming into your portfolios

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In our pan-European portfolios we have been overweight UK companies as a whole, but with a strong bias towards international rather than domestically oriented stock.