Investing after "Brexit"

After the unexpected "Leave" outcome of the U.K. referendum, the experts of Pioneer Investments see conditions for a risk-off environment in the near-term. They believe that Central Banks are ready to act and their immediate focus will be to stabilize the markets and provide liquidity if needed. And they believe that this news flow will continue to weigh on risky assets over the medium-term.

What are in your opinion the implications of the UK vote on the macroeconomic scenario and on geopolitical risks?

Matteo Germano, Global Head of Multi Asset Investments: The British vote has a significant impact on the geopolitical equilibrium, as it creates a precedent in the EU. Britain’s exit could in fact trigger a surge of initiatives similar to the UK referendum in other countries. Upcoming elections in Spain, and the constitutional referendum in Italy will be the next political events to follow in order to gauge the level of political discontent within the region. From a macro perspective, the victory of the leave campaign could increase the probability of the developed world being trapped in a low growth/ low inflation scenario. Fear, and prolonged uncertainty in Europe following the vote could in fact hurt confidence and limit economic activity. A smooth management of the transition - which however will take years to materialize - will be a key factor to avoid a deeper crisis which could hit the global economy.

From a U.S. perspective what will be the impact of the vote?

Ken Taubes, Head of Investement Management U.S.: We believe that the short-term impact of the vote will likely be increased market volatility and a further flight to quality. We are already seeing a fall in the British Pound and a US Dollar rally. US assets may rally, particularly US Treasuries, while there may be a sell off of US high yield assets as well as emerging market assets, partly driven by a perception that the demand outlook for oil will deteriorate in a risk-averse environment. From a macro perspective, the negative economic impact of Brexit on the U.S. should be more limited compared to its impact on the UK and Europe. However, we expect reduced global demand due to a higher level of uncertainty and risk aversion. While the spillover effects on the US economy are unclear, it is possible that in the event of a significant negative economic impact, the Federal Reserve Board might consider other monetary policy options.

What are the main implications of the “Leave” vote for European Fixed Income?

Tanguy Le Saout, Head of European Fixed Income: We expect Brexit will cause a rally in German Bunds, accompanied by an under-performance of other markets, but especially peripheral markets such as Italy and Spain. A sharp “risk-off” environment, accompanied by widening spreads in peripheral and credit markets could cause Central Banks to intervene. The Central Banks immediate focus will be on stabilizing the markets, and they are ready to provide them with liquidity. We believe that monetary policy adjustments will be made, initially through measures of credit easing and broadening of the asset buyback program, but ultimately rate cuts may be implemented. On the currency front, we believe that currencies that would benefit from the “risk-off” environment include the US Dollar and the Japanese Yen.

What are in your opinion the main implications of the vote for European Equity Market?

Diego Franzin, Head of European Equities: We expect the European market to return to risk-off mode following some relief earlier this week. The UK market is likely to suffer a period of extreme volatility as investors digest the potential impact of the event. However, the presumed downward pressure on sterling is likely to be positive for the earnings prospects for certain UK companies given the predominantly international nature of their businesses. Across Europe, we expect this risk-off mode to be mirrored with domestically focused Eurozone business models (financials for example) most impacted given the unknown ramifications of the decision on the Eurozone economy. In this instance, we are keeping a cautious stance on the market and are focusing on companies with a superior business model, while we are cautious on more domestically focused UK business models.

What are the major implications of the vote from a multi-asset perspective?

Matteo Germano: We believe that, considering the recent events in Britain, the European economy is facing a rising risk of remaining in a low growth/low inflation trap. In this light, we prefer to keep a risk-off attitude, favoring safe heaven assets such as US Treasuries. We believe that holding gold could be a natural hedge should the probability of a secular stagnation rise. In currencies, we view the Swiss franc as a natural beneficiary versus sterling, as it tends to behave as a safe haven currency. We also think that the US Dollar could outperform the Euro, with the dollar strengthening because of risk aversion and the ECB remaining very dovish.