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Top Investment Strategies Following Brexit: Where’s Your Money?

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Top Investment Strategies Following Brexit: Where's Your Money?

Brexit might be leaving politicians, commentators, and markets in chaos, but don’t let your investment strategy go off the rails too!

Britain decided on Thursday that it would end its relationship with the European Union after more than forty years together.

While the political and economic future looks incredibly uncertain right now, investors are looking forward to a rational, prudent, and shrewd investment strategy for the coming years.

Read on for these, in regards to bonds, currencies, emerging markets, corporate debt, and stocks.

The immediate political situation

This truly has no precedent.

The EU has 28 member states (Britain is still one of them, for now).

There are a few members of its economic area, namely Switzerland, Norway, and Lichtenstein, and it has free trade deals with over 50 associate states around the world.


But no one has ever left the Union.

Immediately, it is evident the heads of the EU have taken a hard line approach.

They will make sure Britain gets no special treatment and will give it terms that are as harsh as is economically rational for the EU, to deter any other states which could hold referendums: Denmark, Sweden, France and Italy all have strong Eurosceptic national movements.

This flies in the face of many who thought that a Norway or Switzerland-style agreement was possible.

Unless Britain can negotiate a miracle, it will either have to disregard the vote after the parliamentary debate or leave the customs union and trade with the EU according to WTO rules.

This is the worst case scenario, and it is what many investors fear.

The ‘uncertainty’ you will constantly hear about in the coming weeks is almost entirely uncertainty over whether Britain will retain single market access or be forced to put on, and accept, tariffs.

To the business world, everything else is secondary.

Volatility is to be expected for a while, as long as there are no definitive political agreements achieved.

There is not even a guarantee that there will be a new UK prime minister until October.

While the Swiss National Bank has intervened, the Bank of England is not expected to intervene at all unless the situation deteriorates rapidly.

Stocks

Global and European markets took a tumble upon the announcement in the small hours of Friday the 24th.

$2 trillion was wiped off of global markets, while at its worst, the FTSE 100 lost $120 billion (though this mostly recovered later).

Banks bore much of this brunt, with RBS and Barclays, two of the UK’s largest banks, the former of which the UK taxpayer has a sizeable stake in, lost around 15% each.

Morgan Stanley saw a loss of 19%.

The year-end targets attributed to the UK, Europe, and US stock benchmarks were cut by Credit Suisse by a resounding 6.5, 14, and 7.5 percent, respectively.

The Euro Stoxx 50 Index, the leading blue-chip index which covers most European economies (but not Britain) saw its value fall by 14%.

It was finance and consumer discretionary stocks that were hit hardest, while staples and healthcare shares outperformed the rest substantially.

And what the experts have to say

Rippling consequences are the conclusion of most senior analysts.

This includes Jeff Kleintop, who is a head of global investment strategy for Charles Schwab & Company.

He predicts that commodities will reduce in price due to dollar gains from the fallout, which will reduce corporate earnings.

This will, in turn, prompt a devaluation of the CNY (Chinese Yuan) as Europe buys fewer exports from China, and since it represents China’s biggest customer, concerns of economic fragility will be renewed.

But, Kleintop stresses that it is not as dire as many have or are predicting.

According to him, the post-Brexit selloff can be compared to three separate crises that didn’t prove as disastrous and long-term as many thought they might:

  • The selloff following Japan’s March 2011 Earthquake
  • The United States debt-ceiling standoff in August 2011
  • The 2012 Eurozone recession

All three saw declines in their markets of 11% but rebounded to the levels recorded pre-crisis within three or perhaps four months.

They are illustrated in the graph below:

j28.1

A forecast of the euro being at $1.05 is being maintained by Deutsche Bank, its head of global forex research, based in London, said.

This was while the Euro had fallen by one-fortieth to $1.1109 after the Brexit result.

Regarding emerging markets, the currency from the economy most tied to the UK financially, and thus most vulnerable, is South Africa’s rand.

Two of its richest inhabitants lost big after the vote.

The sanctions placed by the EU on Russia are ensuring that the ruble is able to withstand most economic ripples, and Morgan Stanley, who are rumored to be considering moving jobs from the UK to Europe, are advising that it would be prudent to sell Australian dollars against the rising yen.

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Bonds: the name’s bond, falling bond

Credit Suisse has predicted historical lows for 10-year Treasury yields, and Germany and Japan may even move into previously unheard of negative territory.

The benchmark fell about 19 points after the vote to 1.56%, beating the previous record low set back in 2012, of 1.38%.

FTN Financial, based in Tennessee, advise turning to municipal bonds to avoid the volatility of the markets, as fundamentals tend to move slowly for local and state governments.

Merill Lynch’s Treasury Index gained 5% this year, while their municipal bond index returned slightly less, at 4.3%.

j28.2

Wells Fargo senior analysts Boris Rjavinski and Michael Schumacher expect treasuries to outshine bonds over the coming months.

According to them, the fears over the disintegration of the European Union will give treasuries a stronger bid.

Both treasuries and gilts have falling yields as after the US had its credit rating downgraded by the credit agencies in 2011.

Capital will still flow out of the UK to the US, so gilts should not lead treasuries, said the duo.

Emerging Markets: a world away

Geoffrey Dennis, who is the head of the global strategy for emerging markets for UBS Securities, says that developing economies will be largely sheltered from the effects of the UK’s weakened market position.

Countries like Turkey, Greece, and South Africa will not, as they send a large chunk of their exports to the UK (think kebabs, Feta, and natural minerals).

The most obvious effect of a weak sterling is less money for UK citizens to spend abroad.

Some investors may even flee the turmoil in Europe altogether and head to Asia, which could result in higher inflows for currently under-performing economies there.

Some analysts see emerging markets soon reverting to normal business procedures. The high-yield debt that is to be found in emerging economies could reap the rewards of taking advantage of a lower interest rate environment in Europe, which will likely stay that way for a while as everyone tries to weather the next storm.

Essentially, one should look for assets that have the lowest possible stake in the possible ramifications of a complete severance of Britain from the European Union, a possible result of Brexit.

One example could be state-controlled companies in isolated countries like Russia, or debt in far off countries with little trade links to the UK or the EU more widely.

Corporate Debt: The epilogue

Last but not least, corporate debt is an area where many analysts think that the worst has passed or will pass very soon.

Credit Suisse limits the panic in the credit markets to just a day or two, which provides many propitious purchase opportunities.

Morgan Stanley simultaneously advised that one should weather the storm and buy corporate debt in Europe, as the European Central Bank is expected to have a strong response plan for any negative repercussions of Brexit.

It’s clear that there is a bumpy road ahead for investors and consumers alike.

This does not mean that your investment strategy needs to be subsequently confused or nervy.

Follow the advice in this article to steady your ship, and reap the rewards.

 

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