GAM's Gallagher: Brexit Is Not A Significant Risk For Europe

Speaking to Investment Week, Gallagher said Brexit posed an asymmetric risk for the UK, but investors and businesses were unconcerned about the fallout in Europe.

The manager gave the example of the German car industry, which has been touted as one of the industries where Brexit will have the greatest impact across all sectors in Europe, as one area where he believes the effects would hardly be felt

"Brexit is not a significant risk for Europe and it does not get mentioned in Germany, for example," he said.

"The German car industry's biggest markets are China, the US and Germany, which are far bigger than the UK. If car sales fall in the UK and the others are doing well, Brexit does not really matter."

GAM's Gallagher: The best stockmarket returns are not behind us

Gallagher said the focus instead in Europe should be on the completion of a banking union and the creation of a common deposit protection scheme.

He said Germany remained against the scheme as its taxpayers do not want to bail out more countries in the next crisis.

However, Gallagher predicted it could still go ahead over the next few years if the number of non-performing loans in countries like Italy are reduced.

"The protection needs to be pan-eurozone instead of specific to each country," he said. 

"This is a key part of the mechanical underpinnings of the eurozone. When the banks have lower levels of bad loans and capital equity is higher there will hopefully be political agreement for a common deposit protection scheme."

Meanwhile, Gallagher said he was overweight companies whose earnings were domestic-focused instead of from overseas, due to his "bias" towards the European economy.

Around 55% of the portfolio is domestic-earnings focused, compared to the MSCI Europe's 50%, which Gallagher said was driven by the structural changes in the bloc, especially in the peripheral countries.

"You can see these economies have become more competitive compared to Germany, with wages falling and government cuts leading to improvements in budget positions.

"We are now in a situation where the economies are in a current account surplus, there have been structural reforms to labour markets and they are more balanced than they were pre-Global Financial Crisis."

In particular, Gallagher has big positions in construction and building materials companies in Ireland and Spain, due to the rise

in consumer confidence and house prices.

According to FE, the fund has returned 45% over the past three years versus 38% for the IA Europe ex UK sector, as at 14 February.