afr article Investors flee from banks, insurers and asset...

afr article

Investors flee from banks, insurers and asset managers with UK exposures
Banks, insurers and asset managers operating in Britain plunged for a second successive session on the share market because investors fear Britain's decision to leave the European Union will slash profits.
On a day when miners and industrial stocks drove the broader ASX/S&P 200 stock market index 0.47 per cent higher after Friday's 3.2 per cent fall, the aftershock of the Brexit decision was felt in financial services.
The sector accounted for 8 of the 10 worst performing shares. Asset managers Henderson Group and BT Investment Management fell more than 10 per cent, while regional UK bank Clydesdale, insurer QBE and Macquarie all fell sharply.
On the London Stock Exchange, banking giant Barclays fell 5 per cent on the opening although the FTSE100 index opened around 0.5 per cent down.
Currency volatility is only one of the problems worrying markets after Brexit. AP
Montaka Global portfolio manager Andrew Macken said the large drops in the Australian stocks were due to "expectations of reduced future investment returns from stocks and bonds due to a potential recession, reduced demand for credit, a falling pound and future operational risks associated with Britain no longer holding EU membership".
BT Investment Management closed down 10.2 per cent at $7.80 after it said on Monday there would be "no immediate change" to the way the UK-based funds were managed or structured.
Well positioned
The fund manager's UK business, JO Hambro Capital Management, which has £20 billion invested, "is well positioned to respond to any changes". BTIM said.
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Chief executive Emilio Gonzalez said investors are trying to work out if the unexpected Brexit vote will lead to other countries exiting the European Union.
"That is the uncertainty providing a cloud over this. [The market] is pricing in speculation about other negative news that might or might not occur, and as a result there is a lot of extra cautiousness and nervousness around and that is unlikely to be resolved in the immediate future."
A 15 per cent decline in UK stocks and a 5 per cent fall in global markets will cut BT Investment Management's net profit by around 8 per cent, broker Credit Suisse said. The 7.4 per cent fall in the British pound against Australian dollar will also hit profits.
UK based fund manager Henderson Global Investors was the worst performing stock in the S&P/ASX 200 index on Monday, falling 15.90 per cent.
Chief executive Andrew Formica said the impact on the fund manager's operations would be minimal and its headquarters would remain in the UK. There was "no need for a knee-jerk reaction", he said given the exit process will take at least two years.
More attractive
"With the falling pound then the UK could end up being more attractive to overseas investors and absolute return funds specifically can benefit from any market dislocation," he said.
Bennelong Funds Management investment director Julian Beaumont said volatility in equity markets would weigh on the listed fund managers.
"The environment will hurt their funds under management, not just from a market level point of view, but in terms of encouraging fund flows, which is the real growth for their business," he said.
Watermark Funds Management analyst Omkar Joshi said the fund managers had experienced a poor quarter of inflows as a result of the Brexit uncertainty, and "that pent-up demand is not going to eventuate".
"If we see markets being choppy, then there is more downside and even the potential for outflows, which is not in the price."
Clydesdale Bank, whose customers are concentrated in Northern England and Scotland, fell a further 9.4 per cent on to $4.14 after it lost 17 per cent on Friday. JPMorgan downgraded its recommendation on Clydesdale, which had been among the best-performing stocks on the ASX since its listing in February, to underperform.
Watermark's Joshi said Clydesdale's Scottish focus "could create an issue" because of a potential referendum for independence, along "with the possibility of weaker consumer confidence, talk of a recession, delayed spending, rising bad debts and lower credit growth".
Value opportunities
Global insurer QBE, which derives a third of its insurance premiums from Europe, fell 6.75 per cent to $10.23 after telling the ASX "does not anticipate any material impact on our day-to-day insurance operations".
QBE's profit will be hurt by the weaker pound and persistently low interest rates which crimp returns on its investment portfolio.
Investors feared that should the UK leave the EU financial "passporting" rules may change, forcing the insurer to set up offices throughout Europe.
Some funds used the sell-off to buy shares.
Fund manager Lanyon told investors on the weekend it would reopen its fund because value opportunities that did not exist two years ago had emerged.
Mr Beaumont said some shares had been unfairly punished in the Brexit sell-off because they wouldn't be affected by Britain's exit from the European Union.
"There are certain companies that haven't any exposure to Brexit at all and, at a time when bond yields and discount rates are on the way down, their sell-off proves the baby is being thrown out with the bathwater," he said.