Global Investment Committee Meeting Summary

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ABN AMRO Private Banking, Expertise, Private Lending, Lombard lending

The negative impact of the decision by Britain to leave the EU is expected to primarily impact economic growth in the UK, with a more mild effect on eurozone and global growth.

The forecasts for interest rates, the British pound and the euro have been recently revised downward. Risk, and, in particular, political risk, has clearly increased. It is not, however, expected to reach systemic levels. A moderate recession in the UK is expected, but not in the eurozone.

The Global Investment Committee left the asset allocation unchanged at its meeting today. It continues to consist of a preference for cash, equities and commodities over bonds. Real estate and hedge funds are viewed neutrally.

Base-case scenario: uncertainty followed by stabilisation

Given the uncertainty, ABN AMRO Group Economics has set three scenarios: a new base case (believed to be most likely), a more adverse scenario and a positive scenario.

The base-case scenario calls for the UK triggering Article 50 of the Lisbon Treaty before the end of the year and for negotiations with the EU to begin in 2016. The talks are expected to be difficult and prolonged. Financial conditions are not expected to tighten much further and markets should stabilise.

This view is based on the idea that risky assets and risk premiums are close to adjusting to the weaker outlook for economic growth. Nevertheless, political risk is expected to remain elevated in Europe, although the risk of a EU/euro breakup is not expected to sharply increase. Central banks are expected to remain supportive, but face limitations.

Economic growth forecasts revised lower for 2017

Under the base-case scenario, the forecast for economic growth in the UK in 2017 has been revised downward by 2% to 0.5%; the eurozone forecast is moved lower from 1.6% to 1.0% and US growth falls to 1.8% from the pre-Brexit forecast of 2.1%.

The other two scenarios are considered much less likely. One, detailing more adverse repercussions, forecasts a deep recession in the UK and a moderate recession in the eurozone.  In the more positive scenario, companies continue to invest in the UK and economic growth, bond yields and currencies return to pre-Brexit levels.

Equity markets beginning to recover but uncertainty remains

Over the past four trading days since the Brexit outcome was announced, stock markets have recovered somewhat after an initial sharp correction. In general, risky assets, including the British pound, are stabilising. The shock of the British vote is still being digested, however, and there remains a lack of visibility regarding the UK political situation. Safe-haven flows into Bunds, gold, US equities, the US dollar and the Japanese yen have not reversed.  
Earnings growth estimates are beginning to be revised downward by analysts, given the expected negative impact on economic growth from the Brexit vote. So far, these downgrades appear to affect mainly UK, eurozone and cyclically-exposed stocks. The financials sector has been the hardest-hit sector, although it is now improving more or less in line with other equities. 

Fixed income markets improving

Fear also appears to be abating in fixed income markets, where credit spreads are elevated, but stabilising – in line with the modest improvement in equity markets. Government bond yields remain at depressed levels, as do inflation expectations.  Bond yields are in general expected to remain low.  If there is any sign of relief, it is that eurozone periphery government bond spreads are narrowing. In credits, high-yield bonds have suffered more than investment grade, given the large portion of banks in the high-yield segment.

Didier Duret, Chair, Global Investment Committee

Gerben Jorritsma, Head of Investment Strategy & Portfolio Expertise

Recommendation reiterated: wait for stabilisation

The uncertainty created owing to the shock of the Brexit vote continues. It is less than a week since the outcome was announced and the full consequences are still being examined and absorbed by market participants. It is also early in terms of expected earnings revisions and political developments. Market uncertainty is expected to fade as the political roadmap becomes more clear. 

The Global Investment Committee continues to recommend waiting for stabilisation of market volatility before considering re-entering assets that may represent attractive opportunities over the medium term.