- Potential pound drop may aid exporters and overseas issuers
- Utilities seen as havens along with U.K. mortgage lenders
Corporate-bond investors are ready to go bargain hunting as the looming Brexit referendum stokes market volatility.
Investors are preparing for Britain’s June 23 referendum on European Union membership. The outcome remained too close to call a day before the vote, with one poll published this week showing exit ahead and another showing it behind.
“We have raised some cash and would look to add risk where the right opportunities occur,” said Ketish Pothalingam, a portfolio manager at Pacific Investment Management Co., which oversees $1.5 trillion of assets. “There may well be opportunities in the event of a vote to leave as some bonds will end up being oversold.”
U.K. drugmakers and other exporters are possible targets because a vote in favor of leaving the EU on Thursday would likely weaken the pound, according to Pothalingam. Other investors will look for price drops in notes issued by domestic mortgage lenders, which have little currency exposure, as well as by utilities where revenue shouldn’t be affected either way.
“If Britons choose to vote themselves out tomorrow, it’s probably going to create some dislocation in the market,” Kris Kowal, managing director of fixed-income investments at DuPont Capital Management, said at Euromoney’s Global Borrowers & Bond Investors Forum in London. “That’s what creates opportunity. You invest money when the dislocation happens.”
Some money managers are already buying. Luke Hickmore, a senior investment manager at Aberdeen Asset Management Plc, is among investors who have bought utility bonds, including notes from Western Power Distribution Plc, Electricite de France SA and phone company BT Group Plc.
He’s also bought bonds in pounds sold by Apple Inc. on the basis that sterling debt from non-British companies has been hurt even though issuers are unlikely to be affected by a Brexit. The fund manager also acquired Jaguar Land Rover Automotive Plc notes, taking advantage of price dips, because he has liked the luxury-car maker for a while and it’s among exporters that may benefit from a weaker pound, he said.
“Whichever way the vote goes, we’re poised for the opportunities that volatility will throw up,” said Hickmore. Aberdeen oversees about 290 billion pounds ($425 billion) of assets.
A leave vote may cause sterling to fall to below $1.35 for the first time since 1985, according to 21 of 31 economists surveyed by Bloomberg this month.
The possibility of a weakening pound means investors should shun euro-denominated debt from U.K.-based companies, HSBC Holdings Plc analyst Jamie Stuttard said in a report on June 16. U.K. non-food retailers also face a possible double Brexit squeeze because a weaker currency would make imports more expensive, while an economic slowdown would damp sales, he said.
Such concerns prompted Olivier Becker, a fund manager at Oddo Meriten Asset Management SA, to sell bonds issued by U.K.-based clothing retailer New Look Retail Group Ltd. Debt from competitors including Matalan Plc, Debenhams Plc and Marks & Spencer Plc also declined in the run-up to the referendum, along with notes tied to restaurant chain Pizza Express Ltd., according to data compiled by Bloomberg.
Becker is looking out for chances to buy debt from European companies with few ties to the U.K., if Brexit concerns spark a marketwide rout. French food companies Picard Groupe SAS and Labeyrie SAS are possible examples, he said. Oddo Meriten has 46 billion euros ($52 billion) of assets under management.
Any selloff in sterling debt could create bargains among notes from U.K. issuers that are insulated from a weaker pound, according to Gordon Shannon, a London-based portfolio manager at TwentyFour Asset Management, which oversees 6.4 billion pounds ($9.4 billion). One company he’s watching is mortgage provider Nationwide Building Society, which generates all of its sales domestically.
“The implications of Brexit aren’t that negative for them,” Shannon said. “If I saw its price fall a decent amount, I’d be tempted.”