Equity Income Post Brexit - What Next?

The result of the Brexit referendum has been known for some days and ‘Project Fear’ is becoming ‘Project Fact’. No matter what one’s view of the result, this is the new reality.

The purpose of this note is to discusses the likely economic and market impacts from the perspective of UK investors with a yield requirement and to provide an insight into how we are positioning the Sabre Global Value & Income Fund.

In summary:

  • Selectively long FTSE100
  • Avoid domestic UK, Europe. Beware UK dividend cuts (Property, Banks, Retail).
  • Long Asia - equity dividend yield a great strategy here
  • US Assets expensive, but avoid significant risk exposure (long or short) to USD / US Equities for now.

Economics

UK - Significant Slowdown in Economic Activity

This is happening now. Activity slowed in leading up to the referendum, and given the result is unlikely to re-accelerate any time soon. Businesses and individuals will inevitably put investment decisions on hold whilst the considerable uncertainties resolve themselves. Given the depth of the integration between the UK and the EU single market, it is a hard to overstate the magnitude of the task awaiting the UK Government and UK Business. Brexit is likely to be disruptive to business for many years. Additionally the UK’s balance of payments deficit leaves us dependent on global capital flows and sterling is likely to show further strain in our view.

Europe – Negative Impact Highly Likely

In economic terms Brexit will impact on already fragile European economies. Further significant economic, financial and political difficulties wait in Europe, probably the most pressing of which is the parlous state of the Italian Banking system.

Global Economic Impact - Limited

We would expect the economic impact of Brexit on the US and Asian economies to be limited. These areas offer some protection, at least from Brexit related uncertainty.

Companies and Markets

UK

  • We are happy to selectively own Large Cap (FTSE) global dollar earners. Recent sterling weakness move should protect profits (and dividends) in GBP. We hold RDS, GSK, RIO and some precious metal stocks.
  • Domestically focused assets (Banks, Housebuilders, Retailers) have been hit hard over the last 10 days, and represent the market’s clearest view of the likely pain in the UK economy. We avoid exposure completely.
  • We would envisage potentially significant dividend cuts in UK stocks in the retail, banking and property sectors.

Europe

  • A weaker euro will benefit some global stocks, though UK volumes are likely to be adversely impacted as the UK economy slows.
  • There remain significant political, economic and financial clouds on the near horizon. Where we can find quality businesses with diversified global exposure at attractive valuations we will buy, otherwise avoid. Any crisis or significant market falls may present additional buying opportunities in such stocks.

Asia

  • We see stocks in this region as relatively immunised from Brexit impact. Attractive yields, when backed by decent cash flow, can offer good support and our research is focused in this area.
  • China related concerns have impacted valuations in the region which are now attractive in our view. China is not ‘out of the woods’, significant challenges remain and direct China exposure is for the brave.
  • Quality stocks in other Asian economies offer value however. As the fund is not hamstrung by benchmark weightings, we are able to take significant
  • overweight positions in the region, and will do so where we find value. Dividend yield is a winning strategy in Asia and we are confident that our investment approach is more than competitive and can generate strong value added in these markets.

US

  • US assets do not offer value, but have generated attractive returns this year as relative safe havens in economic and currency terms. We can think of few events more deserving of a ‘flight to safety’ than the prospect of a Trump presidency, so USD currency and US Market returns may exhibit apparently ‘perverse’ behaviour in coming months. Our approach to US assets is a safety first one this year, designed to minimise risk in GBP terms.

Have a great week!

Ross Hollyman

Sabre Fund Managers

RISK FACTORS:

Sabre Global Value & Income Fund (the “Fund”) is an equity fund. Investors should be willing and able to assume the risks of equity investing in particular, fluctuations in market price, adverse issuer or market information and the fact that equity securities rank below other corporate securities, including debt securities, in right of payment in the event of issuer insolvency. The value of the Fund’s portfolio changes daily and can be affected by changes in currencies, interest rates, general market conditions and other political, social and economic developments, as well as specific matters relating to the companies in whose securities the Fund invests. The Fund may hold a relatively small number of stocks as compared to many other funds. This may make the Fund’s performance more volatile than would be the case if it had a more diversified investment portfolio. Changes in the rates of exchange between currencies may cause the value of investments to go up or down in the reporting currency. In general, underlying investments denominated in foreign currency are not hedged back into the reporting currency. Among the factors that may influence currency values are trade balances, the levels of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation and political developments. Values may also be affected by developments relating to controls and restrictions on foreign currency remittance of proceeds of investments in a non-sterling jurisdiction. All investments risk the loss of capital. No guarantee or representation is made that the Fund will achieve its investment objective.

The value of investments may go down as well as up and the distributions can also go down or up and you may not receive back the full value of your initial investment. The risks outlined here are some of the more specific risks applicable to investment in the Fund and investors’ attention is drawn to the Prospectus dated 19 November 2015 which provides more information on the types of risk factors investors should consider. Whilst every effort is made to provide investors with accurate and up to date information, some of the information may be rendered inaccurate by changes in applicable laws and regulations. For example, the levels and bases of taxation may change. No information in this document should be interpreted as investment advice. If you feel unsure about the suitability of this investment for you, please consult with a professional financial adviser.

IMPORTANT NOTES

DISCLAIMER: THIS DOCUMENT IS FOR FINANCIAL ADVISERS AND INSTITUTIONAL/PROFESSIONAL INVESTORS ONLY AND SHOULD NOT BE RELIED UPON BY PRIVATE CLIENTS.

The Fund is a sub-fund of Gemini Investment Funds plc (the “Company”), an open-ended umbrella investment company with variable capital and segregated liability between Funds incorporated with limited liability in Ireland under the Companies Acts 1963 with registration number 525228. It is authorised in Ireland by the Central Bank of Ireland as an Undertaking for Collective Investment in Transferable Securities (“UCITS”). The Company is recognised as a section 264 scheme by the Financial Conduct Authority in the United Kingdom. The latest version of the

Prospectus and the Key Investor Information documents are available in English and can be obtained by visiting Any advice provided will be based on and take into account a majority of product types and not every single equivalent product within a given product category. As such, any advice we give is restricted (as opposed to independent) as defined by the Financial Conduct Authority.

Gemini Investment Management Limited is the Distributor for the Sabre Global Value & Income Fund.

Gemini Investment Management Limited is registered in England & Wales No.6795280, Longcroft House, 2/8 Victoria Avenue, London, EC2M 4NS, Office tel: 020 3206 1180, Email:

Issued by Gemini Investment Management Limited authorised and regulated by the Financial Conduct Authority. FRN: 503402

DISCLAIMER: THIS DOCUMENT IS FOR FINANCIAL ADVISERS AND INSTITUTIONAL/PROFESSIONAL INVESTORS ONLY AND SHOULD NOT BE RELIED UPON BY PRIVATE CLIENTS.