The BREXIT vote has been successful and now the questions around what happens to the EU.
The uncertainty around many political, economic and financial issues is likely to drive UK asset prices down.
Here is Pomona Wealth summary of the near term issues we see ahead and opportunities:
A. Political: i. Renewed Scotland independence referendum with separation more likely. ii. UK political stability at risk: Ruptures within the Conservative Party and new prime minister to be elected. iii. Eurozone: Tailwind for independence movements to increase breakup concerns
B. Economic growth i. Uncertainty bears the potential to wipe out growth in 2016.
ii. We would expect zero gross domestic product growth in 2016, with risks of a recession, followed by only little improvement in 2017.
iii. The UK AAA coveted rating has been lost with Moody’s downgrading the UK economy this morning and the S&P expecting to announce its decision later this week on the new rating. This will impact the attractiveness of UK government bonds as a safe haven asset.
C. Inflation i. GBP weakness likely to import inflation, stagflation could become a reality.
D. Currencies i. GBP collapse certain, up to parity vs. USD and EUR possible.
ii. Safe havens: Expect the USD and JPY to profit most. The classical safe haven CHF is too expensive to profit.
iii. The EUR would likely also suffer from negative sentiment, due to the Eurozone’s close ties with the UK. The Brexit possible increases an anti-EU movement in the Eurozone, causing the EUR to lose some of its ‘stability mark-up’.
E. Equity markets i. Immediate effect: Due to rising uncertainty UK equities might retest previous lows. ii. Potential spill over effects to other European countries. iii. Return of normality and lower GBP to support performance of UK large caps
What lies ahead?
1. The leave vote, what does it mean for the EU? Is it the beginning of a complete break-down of the EU, an experiment that has been building for some sixty years? At this stage, we believe this to be unlikely. In the worst case, we may find a core Europe of Germany, France, the Benelux, Italy, Spain, Portugal and Ireland with possibly Scotland (?) to continue to form a smaller EU with the EUR as currency
2) Would the turmoil in the financial markets and lead to a global slump? As the markets have had a decent run up and seem to become complacent, could the Brexit decision be the straw that breaks the camel’s back and the market enter a massive correction? We believe that this scenario is too extreme as it is a regional issue with much less impact outside of Europe.
3)What can we do to safeguard GBP assets or instead, how to play the current volatility? From the volatility there is always opportunities and if you would like to know how specifically to gain from the current events in line with your risk appetite, please drop us a line to arrange a call to receive some direct recommendations.
27th June 2016 Zurich
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