Brexit

AMP Capital Briefing for Authorised Financial Advisers - 30/06/2016

Still plenty to happen. There is speculation around a General Election ahead of Article 50 but this is seen as "wishful thinking" from the Remain team. The financial markets are preparing for Brexit and adjusting their plans accordingly. A mild receission in the UK later this year is likely however a global impact is minimal with UK less than 3% of the global economy. The impact on monetary supply is likely to tighten so policy will likely see an easing from central banks with the ECB, BoJ, RBNZ, BoE, RBA all likely to ease (lower the OCR) this year. 

NZ - UK takes 3% of product exports (lamb and wine) and 9% of service exports (tourism). We will need a free trade agreement with the UK at some stage. Equity markets were strong at the beginning of June and was easing 3% ahead of Brexit. On the day, the market dropped 2.5% hit by the high volatility stocks (Xero) and the Aussie Banks. European tourism funds were down a bit. Defensives held strong. NZ seen as a safe haven with a solid outlook despite what is happening offshore.

Gloabl Listed Real Estate Markets - on the day, huge implications and a follow up day that was negative. Longer term view - this has brought forward the end of the UK real estate cycle, so now taking an underweight position. Questioning London's position as a global finanical hub but it is unclear which market in Europe could take over, so London likely to maintain its status over the medium to longer term. Volatility will be heightened in the short term, particularly with the polictical disarray that is unfolding.

Global Equities - MCSI down 4% (NZD adjusted) on the day. Short term outlook is keeping an eye on the risk of a global recession. Investors likely to remain hyper-sensitive to the political instability (equals volatility).

Infrastructure - The markets gloablly are seeing it more as a polictical issue rather than an economic issues (such as the GFC). Fund down around 4% on the day, down 1% after a week, and back to square today. Continue to maintain a defensive position to UK investment. In Europe, infrastructure was impacted by a 2% downturn. Rates lower for longer and more easing in Europe likely.

Fixed Interest - Provides a stablising impact during growth uncertainty. Funds are up 1% since the Brexit announcement. The risk for this asset class is lower capital gain the longer the uncertainty remains. Duration position has been extended to offset the volatility. Bond yields fell globally on Friday. NZ has been attractive to offshore investors but that has now been eroded. Credit in NZ (and Aust) has not really been impacted whereas Europe and USA have been impacted in the banking sector which will impact NZ over time.

Investment Strategy - "Balanced Funds" were down about 2% last week (up 2.5% year to date) but were back up to square last night. Hence, volatility, but no consistent downturn. UK equities are actually up 10% since the February 2016 lows.

Further Exits -  The chance of further EU exits is low, but not impossibe.

NZ Mortgage Rates -  Unlikely to change too much but getting there will see a number of variables. The market is already expecting a 25bp OCR drop so the RBNZ will need to go further to offset the impact on swap rates and credit spreads. This could lead to a flattening of the yield curve (lower longer term rates). The moving parts include a lower swap rate, a widening credit spread and the need for a lower OCR to offset the impact of these factors on mortgage rates and the currency. The expectation is mortgage rates to stay reasonably stable provided the RBNZ intervenes as expected. If the OCR doesn't drop, then mortgage rates could start to creep up.
 
 
 

From Mercer Research Tue 28/06/16

The most imeediate implications of the referendum results are likely to be:

• The potential for significant market volatility across UK and European markets as participants weigh up the likely implications of Brexit.
• Significant uncertainty in terms of the economic impact on the UK and European economies in particular, but also globally. 

Read the two page report here

 

From Harbour Asset Management - Mon 27/06/16

The largest reaction to the Brexit vote has been in the foreign exchange markets, where the British Pound (GBP) has fallen to its lowest level since 1985. This reflects that Brexit is first and foremost a British political crisis, and a sharp depreciation in the GBP is the best way to help the UK economy through the economic adjustment.

Read more here

 

From AMP Capital Investors - Mon 27/06/16

 

 

 

From Harbour Asset Management

The largest reaction to the Brexit vote has been in the foreign exchange markets, where the British Pound (GBP) has fallen to its lowest level since 1985. This reflects that Brexit is first and foremost a British political crisis, and a sharp depreciation in the GBP is the best way to help the UK economy through the economic adjustment.

Read more here

 

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