A few days after the Brexit in England and it seems the markets are trying to recover from the surprise they did not expect.
The coming period will be very challenging and a lot of eyes will be on European leaders and their ability to keep a unified EU, and at the central bank governors and their ability to stabilize the system and instill investor confidence.
One thing is clear, if anyone expected increases in interest rates in some part of the world, these expectations deferred indefinitely and long government bonds can continue to generate capital gains.
The first sector that will benefit from the decline in bonds yields will be the real estate sector that in the past five years generates significant excess returns over the classical indices because it is based on leverage and the leverage now cheaper than ever.
The British Selected the Brexit (British Exit) and cause a dramatic reaction in the financial markets. The move is likely to hurt particularly the British economy, but also in the rest of Europe and perhaps the world economy as a whole. Accordingly, the sharp declines were recorded in most of the financial assets. On the other hand, there was an escape to safe-haven assets like gold and government bonds.
The Brexit expected to lead to ongoing uncertainty in the UK economy, a slowdown in the recovery of the Eurozone economy and renewed concerns the level of global economic activity. Also, the concern is of the “political” infection effect of countries that may follow Britain.
Central banks and governments are likely to accompany the developments and work to ensure a reasonable level of liquidity and strengthen the financial system. The interest rate will remain very low.
We believe that the Brexit expected to be the catalyst for a period characterized by growing risk aversion. We expect high volatility in the markets, the risk in the stocks increased significantly. However, we believe that it is important to keep cool at this time. Despite the understandable anxiety, it is not recommend doing a “sell-off” of the equity portfolio in the coming days, as past experience has shown that the initial response to Extreme events is usually harsh.
There is a need to take a cautious and defensive investment strategy at the property type, geographical and sectoral level. Despite the possibility that there was “an overreaction”.
In conclusion, unlike the crisis of 2007-8, the feared was from the collapse of large financial institutions, the main risk now is of prolonged uncertainty would hurt the real economy, ie the non-financial investment, international trade, employment and economic growth.
In the Global sectoral level, the decision on the Brexit produces primarily headwind to the banks sector, particularly in Europe. Consumer goods industries and the retail, commercial and residential real estate, energy and infrastructure, chemicals and vehicles are more sensitive to developments in the UK. On the other hand, the communications industries, mining, and health are likely to be less vulnerable. There is a priority to value shares, dividends, and low volatility.
Friday (06/24/2016) will be remembered to be extremely dramatic in the financial markets when a seminal and surprising event given the expectations occurred after learning the results of the referendum in the UK in favor of leaving the EU. The Response to global financial markets did not take long to arrive: Europe’s leading stock indices posted their worst trading day since 2008, led by bank shares index fell by 14%, leading US stock indexes erased all the gains so far this year, the British pound fell by approximately – 10% against the dollar to its lowest level in 30 years, the price of oil fell by about 5.0% and prices soared on shelter assets, as among other things, the price of gold climbed to a record level of two years ($ 1,322 per ounce, reflecting an increase of approximately 5.0%) and yields of the worldwide government bonds dropped (the yield on the 10 years US government bonds decreased to 1.56%, the yields in Germany, Japan, and Britain also fell to 0.05% – 0.2% – and 1.08% respectively).
Europe’s weakest countries yields rose sharply (in the bonds of the Greek government for 10 years there was an increase of approximately 76 basis points to 8.63% and in Italy and Spain recorded an increase of approximately 15 basis points to 1.55% and 1.62% respectively). The risk premiums for most European banks rose. The VIX index rose, though not as extreme panic reflected when increased from 17.6 points to 25.8 points.
There is no doubt that the exit of Britain from the European Union is an escalation in terms of global risks, as the political implications of the decision of the British will continue to accompany the world markets for a long time.
Beyond the volatility in the financial markets that may be more short-term in nature, the risk is expressed by political instability across the continent, while the strengthening of nationalist groups. Could have implications for the world trade, (that is slowing down nevertheless) the mobility of human resources and the adoption of trade protection policy, which harms the productivity and profitability of companies. In the longer term is, of course, raises a question mark for the eurozone, and can restore the concerns to the weak EU policy.
Beyond the increase in political risks in Europe, now the discussion is who is “the Nexit ?”, Ie, those next in line to vote on the exit from the EU, the risk of market disruption will be for a long time and will hurt business and consumer sentiment. This is also the reason why it seems likely that the vigorous measures of central banks and the various governments to calm the markets to avoid political risk becoming a financial risk.
Today, Sunday (26/6), repeat elections will be held in Spain and there is no doubt that the outcome of the referendum in the UK provides a boost to opponents of EU policies and foremost, the party “Podemos”. Their victory may ignite concerns about the stability of the entire eurozone. However, when France and the Netherlands have more voices that are demanding a referendum as well, as did Austria.
In addition, the referendums in Scotland, Belgium or Catalonia may fuel uncertainty and increase volatility in the markets in the medium term.
At this point, it is important to mention that according to Article 50 of the Treaty on the European Union, a country that wants to get out from the EU is facing a process of formulating an agreement on exit within two years. This may take some time, so the dust can settle. Britain will try to create new trade agreements as soon as possible. EU countries will likely try to “extract a price” for trade agreements, in order to deter other states from leaving.
In our opinion, the negative impact on the stock markets on the European continent is expected to gain momentum mainly from the standpoint of “domino effect” and less political economy. For the short term there is no immediate effect on the terms of trade between the UK and EU countries, and the central bank, led by Mario Draghi, is expected to provide a “protective umbrella” as long as necessary.
The “politics” Contagion effect of countries that might follow the United Kingdom, as noted, is a risk factor in the short-medium and feature especially Sweden, Denmark, the Netherlands, Austria, Finland, which France is not immune to the increasing right-wing parties voices in the country.
Eurozone exports to Britain account for about 13% of total exports. Countries such as Germany, the Netherlands, and Belgium there is a relatively high exposure to the British market and may be affected more than others. Estimates for the UK’s economic growth will decrease by one percent over the next year at least and that of the eurozone slightly less.
According to the OECD economists, widening of credit spreads, stock markets decline, devaluation of currencies and harm in the financial conditions could lead to a downward revision of growth forecasts. According to estimates by economists at the OECD, moderation of demand in Europe alongside financial shocks is expected to reduce 0.5% the GDP of the BRICS countries and economies outside the OECD by 2018.
In our opinion, it is likely that the next few days the US will also be marked by “a storm in markets”, similar to large shocks recorded in the markets during the last 15 years, including 11 in September, the bankruptcy of Lehman in 2008, lowering the credit rating of the United States in 2011 from AAA to +AA, and a slowdown in China in August 2015. After the dust settles, you will get a clearer picture regarding the long-term effects of the Brexit.
US banks are under pressure similar to their comparable in Europe, although to a lesser intensity.
Now we will see a further decline in interest rates in the long term in the US, a stronger dollar, and less likely that the Fed will raise short-term interest foreseeable future. All of these hampered further financing margins of banks, and will lead to perhaps the continuation lower levels in oil prices – with a negative effect on the credit portfolios of the energy sector.
At the same time, and regardless of developments in the UK, the Fed published on Thursday the results of the stress test US banks, according to which all participants were 33 banks. This means they can theoretically keep their capital ratios at a level of at least 4.5%, also as part of a nightmare scenario of an economic storm in which the rate of unemployment peaked at 10%, rates of central bank interest rates negative, deflation and so on.
In our opinion, the Brexit will only have a moderately negative impact on the health sector. The immediate effect will be the result of the strengthening dollar. When sub-sectors with significant exposure abroad, especially in Britain include the biotechnology, pharmaceutical, and medical devices. Shares are expected to be less affected included sub-sectors that are exposed to less or no to Europe.
Negative consequences are expected to be for the automotive industry, where there are differences between companies in the industry, according to their exposure to the UK both in terms of sales and in terms of production.
Vehicle sales in the UK are likely to be affected in light of economic uncertainty, the weak pound versus other currencies, particularly against the euro (according to estimates, about 80% of the vehicles sold in the UK are imported, including 50% from the EU) and slower economic growth in Britain. Britain accounts for only about 3.4% of total vehicle sales in the world.
It is important to examine the international exposure of each vehicle body manufacturer. To illustrate, US companies relatively low exposure to sales in the UK, General Motors is exposed to the UK with only 3.1% of its sales in 2015, and Ford with 7.7% of total revenues in 2015 come from the UK. Toyota was exposed to 9.7% of the volume of sales in the UK for its fiscal year ended March 2016.
We expect high volatility in the markets, the risk in the stocks increased significantly. However, we believe that it is important to keep cool at this time. Despite the understandable anxiety, it is not recommend doing a “sell-off” of the equity portfolio in the coming days, as past experience has shown that the initial response to acute stress events followed by some positive correction comes. for the longer-term perspective, we believe that the financial markets are now entering an era of uncertainty, which will influence the long-term markets. There is a substantial likelihood that markets now find themselves in a negative trend in the medium and long term, and therefore needs a decision, in the new trend in the equity component.
It is important to remember that even when neutralizing the horrible events Highlights (a scenario in which the world will slide into recession, the eurozone collapses gradually liquidity crisis serious will happen in the financial markets at the same time when the influence of central banks is weakening and so on), implications of the results of the referendum in the UK for investors all over the globe cumulative to a number of “risk factors”. However, given the fact that Brexit joins a list of other risk factors, weigh heavily on sentiment, led by the profitability of American companies who shrinking for 4 quarters and US pricing level which is among the highest in the last decade.
In view of the expectation of further strengthening and contraction in corporate profits in the eurozone and in light of the significant increase in conditions of uncertainty on the European continent, in our opinion, there is a need to take a cautious investment strategy and more defensive, both the property type, geographical and sectoral level. However, despite the possibility that there was “an overreaction” (Overshooting) markets as proposed number of economists and analysts worldwide.