EDUCATING

SUPPORTING

REPRESENTING

www.charteredaccountants.ie

John McElroy – Investment Manager

15th July 2016

WHAT HAVE THEY DONE?

WHAT DOES IT MEAN?

WHAT SHOULD YOU DO ABOUT

IT?

WHAT A DIFFERENCE A YEAR MAKES

7th May 2015 24th June 2016

“The best argument against democracy is a five minute conversation

with the average voter” (Winston Churchill)

Source: Google Images Slide 1

WHAT HAPPENS NEXT?

• Informal discussions with remaining EU states?

• Decision to invoke Article 50 of Lisbon Treaty by new PM

• Negotiations on exit terms and framework for future relationship subject

to qualified majority vote of remaining EU countries, and EU parliament

consent

• European treaties cease to UK two years later unless remaining EU

countries unanimously agree to extend

Slide 2

TRADE OPTIONS

EU Membership Norwegian Model Swiss Model Canadian Model WTO

Access to single market

Goods Yes Yes

Yes, except

agricultural Mainly

Access with low

tariffs

Services Yes Yes Some No No

Implementation of single market

regulations Yes Yes (75%) Yes No No

Vote / veto on single market

regulations Yes No No No No

Free movement of labour Yes Yes Yes No No

Contribution to the EU budget £123 per capita £106 per capita £53 per capita No No

External tariffs decided by EU EU Swiss Canada UK

Ever Closer Union Some No No No No

Source: LSE “Life After BREXIT” (12th February 2016), Deutsche Bank (30th June 2016)

Slide 3

Exports of goods between Britain and the EU 2014

DOES UK NEED EU MORE THAN EU NEEDS UK?

Slide 4

WILL UK GO THROUGH WITH IT?

• Referendum is not binding on

parliament

• Decision to invoke Article 50 without a

framework agreement with EU is very

high risk for a new PM

• Election before exit could be won by

pro EU parties

• EU has a history of asking countries to

rerun referenda until ‘right result’ is

given

Source: Google imagesSlide 5

MAY-BE, MAY-BE NOT...

• Brexit means Brexit

• No general election until 2020

• Article 50 not to be invoked until at

least the end of the year

• Priority is to continue to have access to

the single market in goods and services

• No budget surplus by 2020 - tax

increases would discourage investment

• Chris Grayling to lead exit negotiations

Source: Google imagesSlide 6

THE AULD ALLIANCE REBORN

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

Scotland UK

Scotland may leave… …but could they afford it?

Yes54%

No46%

If there was a referendum on Scottish independence

tomorrow how would you vote?

Source: Daily Record, Survation (excludes don’t knows), 26 June 2016 Source: Institute for Fiscal Studies, 23 March 2016

Fiscal deficit based on Scottish Government / OBR data Slide 7

UK WAS DOING SO WELL

Slide 8

BUT NOW UK GROWTH LIKELY TO SUFFER IN 2017 & 2018

0

0.5

1

1.5

2

2.5

3

3.5

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F

Pe

rce

nt

(%)

Impact of Brexit on UK GDP Growth Forecasts

Annual GDP Growth Current forecast Forecast prior to the vote

Source: Citi Global Economic Outlook and Strategy, 29/06/16 Slide 9

DUE TO ….LESS INVESTMENT, FEWER JOBS

Significant decrease, 19 Slight decrease,17

No change, 44Slight

increase, 6

Big increase, 3

What impact will the referendum have on your organisation's overall investment plans?

Re

du

nd

an

cies,

5 Freeze, 24Slower

increase,8

Same increase, 32

Faster increase, 2

NA, 20

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

What impact will the referendum have on your organisation's hiring intentions?

Source: IoD, June 24-26

Slide 10

MORE CAUTIOUS UK CONSUMER – ALL ABOUT CONFIDENCE

Slide 11

MORE BANG (i.e. POUNDS) FOR YOUR BUCK

Slide 12

RELATIVELY MUTED REACTION SO FAR

Slide 13

EQUITY MARKET MORE RATIONAL THAN YOU THINK

% change since

23/06/16

FTSE 100 5.4

FTSE 250 -3.6

US $ TO UK £ (WMR) -12.3

EUR TO GBP (BOE) -9.8

COMPASS 12.2

RECKITT BENCKISER 12.4

PERSIMMON -27.5

LLOYDS BANKING GROUP -24.0

Source: Thomson Reuters Datastream, 12/07/16

Slide 14

EUROPE IS QUOTED UK’s LARGEST TRADING PARTNER

Slide 15

…..BUT MEDIUM-SIZED BANANA SKINS

Slide 16

GLOBAL CONTEXT – SUB-PAR ECOMOMIC RECOVERY

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F

Pe

rce

nt

(%)

Impact of Brexit on Global GDP Growth Forecasts

Annual GDP Growth Current forecast Forecast prior to the vote

Source: Citi Global Economic Outlook and Strategy, 29/06/16Slide 17

BUT GLOBAL GROWTH DEPENDENT ON DEVELOPING WORLD

Source: Reuters 5 July 2016 Slide 18

EUROPE – NOT THE BASKET CASE SOME BELIEVE

Slide 19

POTENTIAL IMPLICATIONS OF BREXIT FOR REST OF EUROPE

• Increased political risk - galvanised protest / populist parties

• Reduced economic confidence / lower economic growth

• Smaller EU budget – lower transfers to Central / Eastern Europe

• Reduced immigration to UK

• Increased sovereign bond spreads

• Equity market multiple contraction

Slide 20

QUOTED EUROPEAN EQUITIES – SALES EXPOSURE BY REGION

Source: Morgan Stanley Global Exposure Guide 2016, Estimated 2016 Revenues, 22 May 2016Slide 21

US ECONOMY REMAINS IN GOOD SHAPE

Slide 22

JAPAN MIXED

Slide 23

CHINA - ‘NEW’ SERVICES OFFSETTING ‘OLD’ MANUFACTURING

46

47

48

49

50

51

52

53

54

55

Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16

China Caixin PMI

Manufacturing Services

Slide 24

OIL PRICE INCREASINGLY VOLATILE

Slide 25

“IT’S A MAD, MAD, MAD, MAD WORLD”

Slide 26

POLITICAL RISK NOT JUST IN THE UK

Slide 27

INFLATION STUBBORNLY LOW …. WAGE GROWTH LOW

Slide 28

INTEREST RATES – A TALE OF TWO CITIES

This is Money, 16th December

2015

ECBECB cuts rates to new low and

expands QE

Financial Times, 3rd December 2015

Slide 29

CURRENCIES – MOVING IN THE WRONG DIRECTION?

Slide 30

Source: Google Images

VALUATIONS

Slide 31

BREXIT – UNCERTAINTY WE DON’T NEED

• Outcome of any exit negotiation with EU is uncertain

• Future terms of trade are uncertain

• Length of negotiations is uncertain

UNCERTAINTY DEPRESSES MARKET VALUATIONS AND

DELAYS INVESTMENT DECISIONS

• Outcome of any exit negotiation with EU is uncertain

• Future terms of trade are uncertain

• Length of negotiations is uncertain

UNCERTAINTY DEPRESSES MARKET VALUATIONS

AND DELAYS INVESTMENT DECISIONS

Slide 32

GOVERNMENT BOND YIELDS AT RECORD LOWS

Slide 33

EQUITIES - GLOBAL MARKET OUTLOOK

• Low nominal GDP presents corporate sales growth challenge

• Corporate balance sheets deteriorating as result of share-buybacks and M&A

• Earnings momentum needed to drive share prices higher to improve

• Equities only ‘fair’ value

Source: Citi GES, FactSet Consensus Estimates, MSCI, 30 June 2016

MSCI AW MSCI MSCI ROE 10 yr Eq Risk

BMK WGT 2015E 2016E 2015E 2016E P/B Yield 2015E 2015E 2016E Yield Premium

UK 6.3% -17% -4% 15.8x 16.4x 1.7x 4.4% 10% 6.3% 6.1% 0.7% 5.6%

US 56.7% -1% 1% 18.0x 17.7x 2.6x 2.3% 15% 5.6% 5.6% 1.3% 4.2%

Europe ex UK 14.6% 4% 3% 14.8x 14.5x 1.6x 3.8% 11% 6.8% 6.9% 0.2% 6.6%

Japan 7.6% -2% 9% 14.0x 12.7x 1.0x 2.6% 8% 7.1% 7.9% -0.3% 7.4%

Pacific ex J 4.0% -8% -2% 15.0x 15.4x 1.4x 4.3% 9% 6.7% 6.5% 1.5% 2.6%

Emerging 10.4% -1% 6% 13.2x 12.4x 1.4x 2.8% 11% 7.6% 8.1% 6.3% 6.5%

Global 100.0% -2% 2% 16.2x 15.8x 1.9x 2.8% 12% 6.2% 6.3%

EPS YoY% Price/Earnings Earnings Yield

Slide 34

EQUITY VALUATIONS ONLY ‘FAIR’

Slide 35

EQUITY DIVIDEND YIELD ATTRACTIVE VS. BONDS

Slide 36

SUMMARY - 2016 OUTLOOK

• Brexit a negative for UK & European economies – months / years of uncertainty ahead

• Political risk has increased globally

• Global growth - sub-par economic recovery to continue

• Inflation - disinflationary pressures remain

• Monetary policy - to remain accommodative (more QE)

• Government finances and reforms – finances improving, reforms lagging

• Equities to out-perform bonds – with UK (& Cont. European ?) equities to under-perform global

equities

• High quality global companies should continue to out-perform in this environment

These are the opinions of Quilter Cheviot and is not a solicitation to buy or sell a security. Our opinions have not been independently verified and we do not guarantee its accuracy

or completeness. All expressions of opinion are subject to change without notice.

Slide 37

Slide 38

Slide 39

Don’t let short- term volatility hinder long term objectives

“The Stock Market is a device for transferring money from the impatient to

the patient”…..Warren Buffett

Slide 40

DISCLAIMER

This presentation has been prepared only for the recipient and date shown on the front page. It is not

intended for any other persons and should not be relied upon by other persons.

This presentation has been prepared for information purposes only and is not a solicitation or an offer to

buy or sell any security. It does not purport to be a complete description of our investment policy, markets

or any securities referred to in the material. The information on which the presentation is based is deemed

to be reliable, but we have not independently verified such information and we do not guarantee its

accuracy or completeness. All expressions of opinion are subject to change without notice. Any reference

to the Quilter Cheviot model portfolio, which is used for internal purposes, is purely illustrative and should

not be relied upon. The figures quoted do not include charges.

The value of investments, and the income from them, can go down as well as up and that past

performance is no guarantee of future return. You may not recover what you invest. Changes in exchange

rates may have an adverse effect on the value, price or income of foreign currency denominated

securities. Levels and bases of taxation can change. Investments or investment services referred to may

not be suitable for all recipients.

Quilter Cheviot Limited is registered in England with number 01923571, registered office at One

Kingsway, London, WC2B 6AN. Quilter Cheviot Limited is a member of the London Stock Exchange and

authorised and regulated by the UK Financial Conduct Authority.

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