Waking Up to a Different Europe

How European asset owners responded to the biggest political shock to the continent in years.

June 24 was supposed to be a public holiday in Sweden.

However, after staying up late the previous evening to watch the early stages of the UK’s referendum vote count with colleagues, AP1 CIO Mikael Angberg woke to a result that he and his colleagues—and most of Europe—were not expecting.

“It was a bit of a shock,” Angberg told CIO Monday, having had time to assess the immediate impact of the UK’s decision to leave the European Union.

The fund did a little bit of trading, Angberg said, and his team “gathered digitally” to discuss the immediate fallout for UK and European assets. So much for the three-day weekend.

“As a pension fund it’s not our edge to play the short term market movements,” Angberg said. “It’s important to understand the long term implications and position ourselves accordingly. It’s a question of being able to use our ability to stomach volatility and to take a long term view.”

The falls across global stock markets may well present a buying opportunity, but the CIO said he was prepared to wait. “We are happy where we are, but we’re thinking about the next stage when the repricing is done. We’ll keep a close eye on whether it’s going to be one month, three months, or six months.”

Regarding AP1’s existing UK assets, the fund has exposure to the UK real estate market through some commercial properties. Again, though, it’s a ‘wait and see’ approach.

“We’re not doing anything with these except analyzing,” Angberg said. “We don’t have anything that’s overly sensitive to markets; our real estate has good occupancy rates, for example.”

Markets have been dominated by little more than noise since the result of the referendum became clear. UK Prime Minister David Cameron announced his resignation; European leaders held an emergency meeting over the weekend; the country’s politicians are jockeying for position amid the turmoil. Until credit rating agencies Fitch and Standard & Poor’s cut the UK’s AAA rating Monday night, there had been desperately little information for investors to work with.

“It’s not difficult to make the case that the UK will suffer political and financial instability for some time,” said Stefan Dunatov, CIO of the UK’s Coal Pension. “It’s very easy to believe that we’ll have not just a technical recession but something an order of magnitude worse.”

Changes of any substance for long-term investors would be “slow but significant,” Dunatov added, with nobody yet knowing what the end point will be.

“What do you do in a prolonged period of volatility? It’s not clear what the right thing to do is. It’s too early to tell, but the impact will certainly not be positive,” Dunatov concluded.

In a statement released on Friday, Dutch pension giant APG seemed less relaxed about the vote. It did not wish to “speculate on such an uncertain outcome” and “prepared operationally as best as we could,” but accepted that pension funds were “not immune” to financial markets’ violent reaction.

“Pension funds as long-term investors benefit from a stable economy,” APG said. “The result of this referendum, however, has increased uncertainty and instability, just when the European economy was showing signs of improvement. That is a development that unfortunately not only in the short term but also in the long term could prove to be negative for pension funds.”

Denmark’s PFA released a similar statement but expressed a hope that Europe would “avoid a financial downturn like the one we saw during the financial crisis in 2008.”

“Therefore, the odds are good that in future there will be some developments in the investment markets that will compensate for the present losses,” PFA continued. “It is impossible to predict future events, but Europe as well as the rest of the world has an interest in minimizing the effects of Great Britain leaving the EU as much as possible.”

With sterling hitting a 31-year low, 10-year gilt yields falling below 1% for the first time in history, and the FTSE 100 down 5.6% from its June 23 close, market participants don’t seem so confident. Europe may have a few more working holidays to come.

Related:  Asset Owners ‘Hold the Key to Long-Termism’ & CIOs: What Brexit Means for You  

| cioeditors@assetinternational.com |