Follow the money: Top UK asset manager Philip Saunders explains how traders should play Brexit

Philip Saunders, co-head of the multi asset operations at Investec Asset Management in London
Philip Saunders, co-head of the multi asset operations at Investec Asset Management in London

Philip Saunders is the co-head of the multi asset operations at Investec Asset Management in London. The Cambridge University graduate, one of the most respected money managers in the UK, is directly responsible for billions of pounds of client funds. Like other British investment professionals he has given considerable thought to the consequences of Brexit – the Referendum on whether the UK should stay in the European Union.

In this interview with’s Alec Hogg he says why polls make the vote too close to call and explains why a Leave vote could be a serious setback for the financial services sector and the country at large.

Saunders reckons the best way for traders wanting to “play” Brexit is by taking a position on Pound Sterling – which, with a fortnight to the vote, tells us quite clearly the money is betting on a very different result to the one the polls suggest.

Alec Hogg is with Philip Saunders one of the top team at Investec Asset Management. You’ve got an interesting structure where three of you are jointly responsible….

Yes, the multi asset team has three co-heads. They are myself and Michael Speaks and we run the benchmark relative programs and the total return programs, and John Stopford whom I’ve worked with for many years runs the income-oriented programs.

It’s unusual…

Yes. Co-co-co is unusual, but there are other examples of it. It happens to work in our particular context. We tend to have no prescriptive approach to how we lead teams. Obviously, if you look at a multi asset team, we’ve got 31-person teams. We’ve got quite a large team and we cover the whole waterfront of listed trade-able assets so again, it’s unusual in the sense of the breadth and the extent of the team itself.

The Investec brand has come a long way in the UK – has that translated into more business?

Yes, in the sense that it took us a long time to actually get the brand accepted, particularly in the institutional markets here in the UK These things do take time but we’ve finally got to where we want to be and it does make things easier, but we still work in a very competitive market.

Therefore, you can have the brand profile (and that’s great and important) but you’ve got to basically have a sufficiently compelling product/s proposition as well and I think we’ve got that in a number of areas, which is why we’ve grown so rapidly.

The news media here is full of Brexit – is this a subject that dominates your morning meetings?

I think we’ve got to the point at which we’re fairly bored with the subject. However, we’re in the final run-up to the referendum itself and I think it’s still pretty open.

Therefore, although the bookies still resolutely believe (if you look at the betting odds) that Remain is going to get a substantial majority… If you look at the opinion polls, they actually sit neck and neck with obviously, a high proportion of undecided potentials.

Do you follow the money or the opinion polls?

I tend to follow the money. UK assets had a bit of a dip about six weeks ago when Sterling weakened sharply on Brexit fears. But by and large, Sterling is trading at 1.45 against the Dollar today so we’re not picking up much on the prospect of Brexit happening.

If market participants believed there was a significant prospect of a win for Brexit – and particularly, a large win for Brexit – then Sterling would be considerably lower than it is currently.

Why is the economics so compelling about staying part of this union?

Well, part of it is that we spent the last 30 years restructuring our economy and integrating it with the single European market. Whether or not you believe the argument about the UK’s longer term prospects, its medium term prospects are pretty messy in the event of a Brexit vote. We’d have to disentangle that.

It’s highly unlikely we would get the same terms. Europe is basically concerned about political fragmentation at any rate and therefore, is unlikely to give the UK an easy ride. The whole thing is going to last at least two years and probably longer than that, because you haven’t actually gotten to the starting line until the actual button is pressed. It’s not just about the vote.

Extremely distracting, not just for governments but for businesses too?

Yes. The UK has benefitted significantly from inward flows of investment from international companies that believe that the UK is a good base to manufacture or to sell services from, to enter the wider single market. If you look at the auto industry in the UK, that’s a good example. We’re probably going to exceed the maximum production level, which goes back around 30 years.

The UK auto industry obviously shrank very significantly in the meantime, and now production is approaching its previous highs, which is pretty remarkable.

Most of that is to be exported to Europe and most of that basically, is manufacturing by foreign-owned companies in the UK Going forward…again, the case for those companies to continue to invest in UK manufacturing (at least on the auto side) is going to be significantly less.

There’s been a lot of noise about how destructive Brexit could be for the City of London…..

If you were to have a referendum within the city, incorporating the city workers, I think it would be overwhelmingly in favour of remain. Obviously, there are significant voices that argue against that but they’re very much in the minority. Turkey’s don’t vote for Christmas.

London and the city, and the financial services industry contributes very significantly to the UK’s GDP and I think that if you have a Brexit vote then again, that’s going to significantly affect jobs in the city.

Eventually, the Brexit hope is that we replace this demand with demand from the wider world, i.e. trading Renminbi for example or trading with India etcetera but effectively, we haven’t had that much success in doing that to date. This is a very slow-burn opportunity so short term pain – definitely. Uncertain about the long-term gain.

Why would it be such a ruction for banks and financial services businesses?

Well, the fundamental reason is that the UK is currently the financial centre of Europe so most Euro debt issues and trading in the currency actually happens here. If we are outside the single market then if I were in Europe (if I were sitting in Frankfurt or Paris), I would be extremely uncomfortable having the main market for European assets outside of Europe.

Inevitably, there would be a very significant push to make it regulatory unfeasible (or less feasible) to base operations here. That would involve a significant shift in terms of high value jobs to – probably – Frankfurt.

How important is the financial services sector to the UK economy?

I don’t have the numbers off the top of my head but it’s a very significant contributor. For example, manufacturing has steadily shrunk as a proportion of GDP and the UK is a very financial-based economy. Invisible earnings from selling services offered by the city (and we’re talking about a whole range of activities that this involves): again, it’s a very significant part of the UK’s economy.

So it’s almost like committing suicide from the City’s city’s perspective because London would stop being Europe’s financial hub?

Yes. Back in the 1970’s, that was the case. Obviously, the great news was that property prices significantly lowered then, even in real terms because we went back to being an international financial centre. I think London remains an international financial centre but clearly, one of its important engines is effectively going to be significantly impacted by those kinds of changes.

What do the ‘leave’ camps have to say about that possibility?

Well, I think that the ‘leave’ camps probably agree that in the short term, it’s going to involve quite a lot of restructuring and pain.

They think that in the longer term, having the greater freedom to run our own affairs is going to be beneficial and they think that provided we do the right things that are sufficiently entrepreneurial then the new market opportunities in the wider world outside the single market in Europe will be the primary focus of the city’s activities.

And that will be more than sufficient to replace income generated from being able to trade on the current terms in a European context.

Just from a broad economic perspective: when you look at the labour legislation – the socialisation of many parts of Europe, – it does appear as though the UK has managed to escape a lot of that. If Britain stays in the EU, will there be contagion?

I think there’s a low chance of that and if anything, it’s become lower because things are moving in another direction in Europe, quite apart from anything else. It forces integration, and socialisation is basically coming up against a natural limit at any rate. Clearly, the one thing that all of these economies need to generate is more growth.

Ultimately, if you’ve got restrictive working practices that basically, are inhibiting that then gradually, I suspect that there are going to be revisions even in the more socialist type of economies in Europe.

There’s a misunderstanding, though. Essentially, we tend to blame anything remotely wrong, on Europe in the same way that the Scots blame Westminster for all of their ills. In reality, we have a lot of flexibility to chart our own course, albeit under a Euro/single market umbrella.

I suspect that what we need is more effective administration in government here in order to maximise our opportunities. After all, look at Germany. Germany is the most successful economy by a country mile (or a country kilometre or two) and they obviously have a pretty generous welfare system, even though they had to change it somewhat.

They are much more effective exporters than ourselves so it is possible to have a successful economy within Europe and it is also possible to make choices about the degree of welfare that you’re going to permit your working weeks, etcetera. I think what we have already in our control are the major determinants of success or failure.

The one thing that people have not looked at which is particularly critically, is just how badly the UK has been run and governed over the last 20 years.

Many other European countries are themselves considering the same kind of Referendum as the UK and seem even more likely to have their own Brexits. If they do so, and the UK stays in, wouldn’t that make all of this a futile exercise?

Well, my view is that there is a bigger issue and I think that basically, it relates to populism and really, local populations becoming very dissatisfied with how the ‘political elite’ has run (not just the UK – I obviously expressed my opinion earlier on) in a number of European countries.

By and large, economic growth, particularly in the south of Europe, has been pathetic. In Italy, you have not seen any real GDP expansion over the last 15 years and there comes a point when the local public is going to basically, use its democratic right to vote in non-establishment political leaders who will obviously blame a lot of the particular country’s woes on Europe.

In some cases, that’s justified. The impact of the single currency has been (I think) extremely negative. It was unwise to force the adoption pace to the extent that that occurred.

I think it’s part of a broader thing and it’s basically about populism and being unhappy with the leadership. However, even leadership is difficult in an environment where you’ve got very significant globalisation going on. You’ve got competition from a rising China and a rising India, and the world is changing in a very major way.

You’ve also got technological change so these are difficult times, but leadership has been pretty inadequate and the impact has been felt at the grassroots level. Eventually, the grassroots gets up and exercises its democratic right. It may well be that Europe does have problems and I think Italy would potentially be the next candidate.

Some interesting things are occurring in France so the UK voting to remain in will help provide some support to the European framework, but it’s not a given that it’s going to survive at any rate. I just think that the UK shouldn’t be the one that pulls the plug.

All of this reminded me of a book that I read that was written 20 years ago, called ‘The Sovereign Individual’ by Davidson and Rees-Mogg, where they forecast the political and corporate elite would come under increasing pressure. They were obviously ahead of their time but what you’ve articulated now does seem to support that thesis, that perhaps Donald Trump’s rise is also part of this whole trend that we’re seeing.

Yes, him and Bernie Sanders – my (almost) namesake. Yes, it is indicative of largely, the impact of globalisation on the previous structure, which was much more stable in terms of job security and the pay in real terms, particularly for the white-collar type jobs (and blue-collar jobs).

I think that we’ve undergone this very wrenching change and the ruling elites have not done a particularly good job of managing it. Obviously, the US has adopted a much more ‘laissez faire’ approach than Europe but I think neither has ultimately recognised the degree of disruption that a large part of their populations have actually suffered as a result of this.

Overall, it’s obviously lifted much more people out of poverty but it’s this huge arbitrage because obviously, things were too expensive in the developed world. In the emerging world, we’re seeing that difference being steadily eroded and that means that it’s been very difficult for large parts of populations in the developed world to meaningfully improve their standards of living. I think that’s what it boils down to.

The argument from the ‘leave’ camp appears to be very emotive. Is there much substance behind it?

This is difficult territory because I can end up getting lynched if I express a particular view on that. Clearly, it’s a less ‘black and white’ thing than the ‘leave’ campaigners would have us believe.

As I articulated earlier on, I think we have a lot of control over our own destiny within Europe and clearly, there are frustrations as a result of that but ultimately, you need a compromise if that’s the framework that you’re managing with your near neighbours. I think we’re also competing against large blocks, externally.

There’s the north American block. There’s the China block, other Asia and obviously, India is becoming increasingly important. Actually, the UK is quite small in the overall scheme of things, so it’s partly that.

Coming back to this point I was making about the Scottish referendum (that Westminster was blamed for anything that was not right/going wrong, or people were unhappy about), we’ve had a diet of this kind of commentary for the last 20 years in the UK.

This has affected people. Obviously, what has crystallized that recently has been the sheer degree of immigration that’s occurred recently and that’s really what I think has stirred up grassroots opinion, more than anything else. That is real but then again, this country – historically – benefitted enormously from immigration but people tend to forget that.

The British are very moderate in many ways but in this case, they seem to be starting to become increasingly emotional. Are you expecting to see third-world type chanting and politicising or is it going to be handled in a very British, civilised way?

Well, I think the reality of the situation is that the ‘leave’ campaigners have lost the rational battle (in my view) and so therefore, they are inclined to actually resort to the emotional arguments much more heavily than they might have originally anticipated.

I think that in the final two weeks or so, which we’ve got left before the vote actually happens, I suspect there will be an attempt to appeal even more aggressively to the emotional argument rather than the rational argument.

On the other hand, people don’t like change. Would that not automatically favour the ‘remain’?

I would say that the general opinion in the UK (for a long time) has generally been Euro-sceptic. In a way, there’s not a lot of love for the status quo. You can cross that with the passion of the people of the Brexit persuasion and again, it’s very analogous to the voters.

It’s close – the way that you’re sizing up both camps.

That’s what’s going to sway a lot of the more mainstream voters. I suspect that on balance, we will vote for the status quo. I don’t know whether that will be a narrow ‘in’ or a stronger ‘in’. Of course, with a lot of people there is a large undeclared group as there was in Scotland and I think that in a way, the ‘leave’ campaigners are noisier than the ‘remain’ campaigners. I suspect that the national temperament is to not go for radical change.

One of the reasons I think supports that view is that there is a general appreciation. Electorates normally do radical things when things are either terrible as they were in the 1970’s, or when things look fine and people believe that they can take a risk. We’re not in the terrible state because the UK economy got through the global financial crisis etcetera, but it’s still in a relatively fragile state. Therefore, if we disrupt things, then we are going to experience a recession.

There are going to be a lot of people out of work and we will go through a fraught period. Bear in mind that the U.K.’s government debt to GDP ratio is well up in the 80’s, which is high and the current account deficit is running at something like six percent of GDP as well, which is also normally associated with crises in other countries. I think that there is a sort of tenuousness about the current recovery. Why make a bad situation worse?

Is there a best case scenario here, i.e. a very close win for the ‘remain’ side sending a message to politicians that old ways must change?

That is certainly a possible outcome and I think that would mean that certainly, the Conservative Party would remain destabilised in those circumstances. Would it put the UK in a better negotiating position? We’re done on negotiation so I think the interesting case would actually be narrow out because then… Would there be a renegotiation or an attempt to have another referendum? Basically, narrow in or narrow out… Again, it’s not going to abolish the uncertainty.

Really, we want something a bit more definitive either way but I don’t think we’re necessarily going to get it.

As a trader, how do you hedge yourself against the potential outcomes?

As I mentioned earlier on, Sterling has traded relatively well at the moment and therefore, I think that if you like an out – even if it’s a narrow out – it’s basically not priced in markets at the moment.

The strain will be particularly taken by the currency. If you think about UK equities then actually, currency weakness will… A lot of the larger companies are global companies so it’s not really exposure specific to the UK economy so the currency would take the strain.

Then there is a financial requirement, for instance, “What will happen to interest rates?” If the currency is very weak then of course, official rates (even though the underlying economy might be weakening) might have to be increased, which would put further downward pressure.

I don’t think guilds look particularly attractive at any rate so it’s a fair decision to own bonds in another currency (US Treasury Bonds, for example). If you were concerned about it then basically, it’s not too late to sell Sterling. In terms of a ‘remain’ vote, particularly if it’s an emphatic ‘remain’ vote then it will be business as usual and you would probably see a little bit of an upside in Sterling. The U.K. equity market is cheap at any rate and so that might well have a run in relative terms.

One hears Brexit will affect property prices… Some people talking of a 20% drop – is that alarmist?

Clearly, the prices of some property stocks that have portfolios of London commercial property, did weaken significantly. They subsequently rallied but they’re still materially below the levels that we saw at the end of last year. In terms of the wider residential property markets, I think that in the south and particularly in London, prices are extended at any rate.

What a ‘leave’ vote would do is presumably, accelerate an adjustment that probably has to take place at any rate. How fast that is… I suspect that there’ll be a material sell-off and then a bear market rather than something more dramatic than that.

If we summarise then, follow the money, the bookmakers have about two-thirds chance to stay in one-third for a Brexit. Sterling is also discounting.

It’s probably in line with bookies. We can certainly see plenty of volatility over the next couple of weeks, particularly if the opinion polls remain as tight as the currently are and literally, even the bookies’ odds are flapping around.

For example, Remain had a bad week last week and the odds shifted from 25 to 30 and then basically, Cameron did his thing in an ITV debate today and it’s back down to 25. Ultimately, nobody knows. We may see a clearer trend emerging as more people declare their voting intentions but I think a lot of people are going to wait until the last minute to finally make up their minds.

Which way are you going to be voting?

As I said, ‘turkeys don’t vote for Christmas’ and so I’m in the ‘remain’ camp. I was deeply sceptical about the Euro and I’m very glad that we didn’t join the Euro because I think that would have been a disaster for the UK I think that on balance, the UK has a pretty decent deal within Europe. I think that if we ran ourselves better then we could have the international prizes as well as the European prizes.

It could actually be a good wake-up call all around.

I’d like to think so but I think that I would reserve judgment on that.

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