Investors Map Post-Brexit Strategies Amid Global Market Upheaval
London (Jun 26) Britain's vote to leave the European Union almost a quarter century after its creation with the Maastricht Treaty left global markets in disarray Friday. Today, investors start to figure out the way forward.
“Ultimately, we have no experience in what will happen next,” Glen Capelo, managing director at Mischler Financial Group Inc., who has spent the intervening years on various trading desks, said in a note to clients. “Twenty-three years of positions may now need to be unwound,” he added in an e-mail.
While investors were caught off guard by the vote, several themes emerged from the frantic trading and onslaught of research reports. This market map for the coming months may or may not lead to treasure but almost certainly involves Treasuries:
European equities are likely to bear the downdraft’s brunt. Credit Suisse Group AG cut year-end targets for U.K., European and U.S. stock benchmarks by 6.5 percent, 14 percent and 7.5 percent, respectively. Morgan Stanley sees Britain’s FTSE 100 Index falling as much as 19 percent and the Euro Stoxx 50 Index dropping up to 14 percent, with financial and consumer discretionary stocks hit hardest and staples and health-care shares outperforming.
Jeff Kleintop, chief global investment strategist at Charles Schwab & Co., predicted rippling consequences: U.S. dollar gains from haven-seekers will push down commodities, cutting companies’ earnings and prompting devaluation of the yuan as fewer exports to Europe, China’s biggest customer, possibly “renew economic hard landing concerns for China.”
On a more hopeful note, Kleintop compared the current selloff to those following Japan’s March 2011 earthquake, the U.S. debt-ceiling standoff that August and the 2012 euro zone recession triggered by the debt crisis. All three markets declined at least 11 percent. “It is important for long-term investors to note that in each of these instances stocks rebounded to their pre-shock level in three or four months,” Kleintop said in a note.
Stock-trading ideas run the gamut.
Yogi Dewan, chief executive officer at Hassium Asset Management, says he’s selling European stocks to buy U.K. equities, because he expects the Bank of England to cut rates and reignite its quantitative easing program to support growth. Capelo said such moves may make matters worse for banks already “crippled by the negative rates.”
RBC Capital Markets suggested investing in Nordic banks including Danske Bank A/S, Swedbank AB and DNB ASA because “they have relatively low beta and their earnings should be more resilient.” Strategists at Wells Fargo Investment Institute predicted the U.S. dollar will emerge unscathed, helping U.S. companies that sell overseas, and stood by a 2016 target for the Standard & Poor’s 500 Index that implies a 7.5 percent gain from Friday’s close.
And there are always the companies that produce the premier safe-haven asset. The MSCI ACWI Select Gold Miners Index rose about 6 percent on Friday, reaching its highest level since March 2014.
The largest risks in the foreign-exchange markets involve commodity-rich countries and economies reliant on the U.K. The biggest beneficiaries are likely to be the traditional safe havens, the dollar and the yen.
Lee Ferridge, the Boston-based head of macro strategy for North America at State Street Global Markets, said the yen may strengthen to 95 per dollar by year-end, from about 102 Friday. The pound will probably recoup some losses and trade at about $1.40 against the U.S. dollar, he said.
Deutsche Bank AG is keeping its bearish year-end euro forecast at $1.05, George Saravelos, co-head of global foreign-exchange research in London, said in a note. The euro slumped 2.4 percent to $1.1109 on Friday.
South Africa’s rand is among the most vulnerable emerging-market currencies because of close financial ties to the U.K., while ruble investors may find some benefit from the isolation provided by sanctions on Russia, UniCredit SpA analysts said before the vote. Morgan Stanley advised selling Australian dollar against the yen.
Investors who bet against Eastern European currencies going into the vote expect further declines. Peter Schottmueller, head of emerging-market and international fixed income at Deka Investment GmbH in Frankfurt, shorted the Polish zloty and Brazil’s real before the referendum. He closed his real position when it started trading Friday and is keeping his bearish bet on Poland, which counts the U.K. as its third biggest export destination.