Last updated: 19:48 / Friday, 24 June 2016
51.9% LEAVE vote in the UK

Brexit Causes Chaos in the Markets, but There are Still Opportunities for Asset Managers

Brexit Causes Chaos in the Markets, but There are Still Opportunities for Asset Managers
  • Brexit Puts the Future of the EU in Question
  • The pound saw its worst level since 1985
  • Selloff in unrelated markets create opportunities

In a historic turn of events, the UK voted LEAVE in this Thursday's referendum. After the result, the pound traded at minimums of over 30 years, and markets worldwide experience a selloff, but that doesn’t mean there are no opportunities to make money in asset management.

“Markets had been expecting a Remain vote, which means that this comes as a nasty surprise,” says Lukas Daalder, Chief Investment Officer of Robeco Asset Allocation. “This will lead to a lot of volatility and uncertainty in the days and weeks ahead, with risk-off pressures at first taking the upper hand.” But more than this short term volatility, once the smoke lifts Robeco expects a medium-term correction of 10% in European stocks and a decline of the pound against the dollar in the order of 15%. For their Asset Allocation team the mandate is to reduce risk and manage volatility looking for stock-specific opportunities.

Which is in line with what Eusebio Diaz Morera from Spanish EDM, whose signature fund has a 27% exposure to British stocks, told Fund Society in Mexico “Brexit volatility is in the markets not in the companies, the conversation in the companies is short and they are not as affected. As long as you stock pick robust companies with high ROE and growth perspectives with a strong leadership, you should be ok.” In the Forex arena, Nestor Quiroz, founder of FFSignal liked the opportunities presented by the Japanese yen which parity saw a 16.6% movement in the first 7 hours.

According to AXA IM “Central banks are ready to inject liquidity - as much as needed in order to prevent any liquidity squeeze in any important market, starting with equities... to some extent, financial markets’ reaction may influence political reactions, in case of acute tensions, on periphery debt, or some key sectors of the economy, such as banks.” They believe that in the short term, economic growth and jobs are unlikely to be affected: “real economies are like super tankers – they are slow to react to political and financial changes. Yet, market and political developments will be critical. As for the former, if well targeted, they will reduce financial market volatility and limit the extent of contagion across countries and thus mitigate the impact on real economies.”

Prime Minister David Cameron has announced he will resign once a new leader is chosen. The next PM will have to ‘deliver the instruction’ given by the popular vote and activate Article 50 of the EU Treaty in order to initiate the two year exit negotiations and deal with a probably “LEAVE the UK” vote from the Scottish, which voted to STAY in the EU. However Amundi believes that “a large chunk of this chapter remains to be written. Neither the governments nor the central banks are helpless during the transition phase. Within the EU, the political response will come through close cooperation to align governments’ positions and obtain an “orderly exit” of the UK from the EU. Until now, EU countries have always managed to benefit from periods of stress to consolidate their institutions.”

For Marcus Brookes, Head of Multi-Manager at Schroders, Japanese equities, Emerging Market equities and gold look like interesting bets, while he expects to stay away from high quality bonds.