Investment strategy: Turmoil continues

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The repercussions of the British referendum to leave the EU continue to impact financial markets around the world. During the second trading day following the outcome of the Brexit vote, European equity markets and the British pound moved below the early lows seen on Friday. Asian and US equity markets, however, appear more resilient with relatively more modest corrections.

Risk has risen, but not to a systemic level

The Global Investment Committee, at its meeting this morning, recognizes that risk, and, in particular, political risk, has increased. It is not believed, however, that systemic risk for the economy and therefore markets, is on the horizon. A recession in the eurozone or the US is also not expected. 

As detailed in today’s publication from Group Economics, "The consequences of Brexit", the effects on the UK economy will likely be more severe and a downturn is expected there. Already the British pound has fallen by 8% against the euro and 12% against the US dollar from the highs of yesterday, before recovering somewhat.

Stabilisation is expected

Within European equity markets, the financials sector (especially UK banks) continues to be the hardest hit, while defensive-growth and dividend-yielding stocks show modest gains. In fixed income markets, there are lower yields across the board.

Our interpretation

Over the weekend, the complexity of the political situation facing the UK deepened. There is a great deal of uncertainty in how the crisis will be solved. At this early stage of the adjustment process, the Global Investment Committee (GIC) believes that the lack of transparency regarding the political solution is overriding economic concerns. While the Spanish elections on Sunday did not create any additional worries, the political uncertainty between the EU and the UK is set to continue for some time. 

Group Economics is revising its base-case economic scenario of the effect of the Brexit to include a moderate but nonetheless negative impact on the macroeconomic outlook, on central bank policy and on financial markets. For the GIC, the concern is that the longer there is little political visibility, then the more negative the impact is likely to be. Nonetheless, an orderly exit of the UK from the EU continues to be expected, although uncertainty remains high.

Investment recommendation repeated: wait for stabilisation

The GIC is convinced that in this environment of increasing uncertainty, investors should wait for markets to stabilise before re-entering. Volatility across all markets, including 'safe havens,' is expected to continue as part of the market’s adjustment to the new reality of Britain leaving the EU. The first opportunity to resolve some of the political uncertainty and for the creation of political leadership comes with the EU Summit, which begins tomorrow.
 
The GIC will wait for a stabilisation of market volatility before considering re-entering assets that may represent attractive opportunities over the medium-term.

Didier Duret, Chair, Global Investment Committee
Gerben Jorritsma, Head of Investment Strategy & Portfolio Expertise

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