DIY Investor Magazine
/
July 2016
29
Ben discusses the market’s reaction to Brexit, the impact on the portfolio and positioning,
and the opportunities that have presented themselves from this unprecedented political event
Ben Lofthouse, Henderson
International Income Trust
Brexit – a Political, not a Financial Crisis
Jenna Barnard,
Henderson Diversified Income Ltd
While the ‘Brexit’ result of the EU referendum last
week may be the biggest political crisis in the United
Kingdom since the Second World War, this should not
be conflated with a financial crisis in our view. Credit
markets are not currently suggesting systemic risk
in the banking sector or a move to a higher default
rate regime for corporates — banks are in a relatively
healthy place due to rigorous regulation and stress
testing over the last few years.
Clearly the result is a significant blow to economic
confidence/’animal spirits’ in the short term and will put
at least a temporary brake on growth in the UK and
perhaps Europe. Bank share prices have also been hurt
and their willingness to lend remains muted. European
companies are therefore likely to remain relatively
conservative — more about dividends and conservative
balance sheets than share buybacks/mergers and
acquisitions (M&As). This business cycle continues to
struggle to gain traction in Europe due to the constant
political crises.
We believe that the Bank of England is likely to cut rates
to 0% from 0.5% currently. The Governor, Mark Carney,
has said that he does not want to take rates negative. We
expect further credit easing eg, resurrecting the Funding
for Lending scheme if needed and more quantitative
easing (QE), possibly. With yet another central bank
heading towards zero percent interest rates, this continues
to fuel the ‘global’ grasp for income yielding assets we
have written about in recent months.The issue at stake
as of today is clearly ‘how’ the UK exits. There are soft
and hard versions of exit, with soft (maintaining access
to the free trade area) being the preferable version for
the economy. Would the Europeans allow it? Currently,
the Germans appear to be taking a softer tone than
the French. While Brexit alone is not sufficient to derail
the current low default rate picture – the number of
businesses defaulting on their credit lines - we have to
proceed cautiously. Events could take a different turn
next week with some very important data due in the US,
such as non-farm payrolls, and the Institute of Supply
Management (ISM) and other Purchasing Managers’
Indices (PMIs). Should the data be poor, given the very
poor non-farm payroll for May (38K), markets may quickly
start to worry about a global recession.
