With the passing of a few days, a few comments on the Brexit.
1. The political impact of the EU exit of the United Kingdom far outweighs the economic impact
2. Quick comments on an event that has few historical precedents are essentially speculation and should not influence a long-term oriented investments strategy
3. Most commentators have concentrated on the economic bear case (more volatility, rising recession risk). Bull case would be that Brexit acts as a game changer for the EU, leading to structural reforms and ultimately reducing the EU to a free trade zone
4. The initial reaction of the financial markets has been what could be expected: sovereign bond yields have fallen, the pound has depreciated, stock prices have declined and prices of ‘safe havens’ have risen
German 10-year sovereign bond yield
Source: Bloomberg
5. With political uncertainty remaining high and political risks skewed to the downside, government bonds and safe havens will remain well supported
6. Brexit provides an excuse for more monetary easing which should limit any downward movements in equity markets
7. In an environment characterized by prolonged uncertainty, investors usually value quality and visibility. Within equity markets, the attributes are generally not found within sectors that are very cyclical or within the financial sector
8. The pricing of financial assets in southern Europe is critically dependent upon the credibility of EMU. These assets would be the main losers in case of a rising risk of a Eurozone break-up
9. Asia on the other hand could benefit from a less aggressive US monetary tightening cycle
10. Longer term, Brexit reflects a rising anti-establishment trend rooted in income inequality and a loss of faith in institutions (political as well as monetary). This is not favorable for capital markets, given that capital has benefited tremendously from what the establishment stood for: free trade, deregulation, globalisation and immigration. Equity valuations do not reflect this.