09:00 1 July, 2016
Multi-asset: One week on from the Brexit vote
Given the political shock of the UK’s vote to leave the European Union (EU), market movements since the referendum was have not been as dramatic as one might have expected.
After some significant volatility in the immediate aftermath of the result, announced on 24 June, a sense of calm returned to global markets in the following week – for the time being at least.
As such, the M&G Multi-Asset team has not yet observed market movements significant enough to justify materially adjusting its fund portfolios. The team, however, remains watchful for value opportunities created by contagion of pessimism away from the ‘eye of the storm’. Investing for the long-term where asset prices depart from their fundamental values because of emotion is the essence of the team’s ‘episode’ investment philosophy.
Since the referendum, the price of mainstream government bonds, like those of the US – traditionally seen as among the lowest-risk investments – has risen, reflecting high levels of risk aversion among investors. Higher prices have pushed the yield on these bonds – annual investment returns as a percentage of the price paid – lower.
With falls in the yields on mainstream bonds, the risk premium – in terms of higher prospective investment returns – on certain emerging market government bonds, such as Mexico for instance, rose sharply, thus enhancing their appeal, in the team’s view.
12:30PM 24 June 2016
10:00AM 24 June 2016
Multi-asset: focusing on the fundamentals
Financial markets around the world have responded significantly to the UK’s vote to ‘Leave’ the European Union (EU). Some of these market movements may, in time, be seen as an over-reaction.
After months of uncertainty, the referendum result at least adds some clarity for investors, but introduces new uncertainties that will only be resolved in the coming months and years. Political uncertainty is naturally uncomfortable, but global investors must reflect on whether the result accurately represents any fundamental change in the investment environment.
While it could be argued that it justifies the UK pound’s 10% fall in value relative to the US dollar during the night of the referendum result, does it justify a large fall in the value of shares in Japanese banks, for instance? The scale of some market movements around the world following the result could reflect a degree of short-term panic, rather than a measured response.
There has been a predictable flight by investors towards major currencies perceived as ‘safe havens’, including the Japanese yen and the Swiss franc. Declining prices across European stockmarkets on Friday morning were also anticipated.
Market over-reactions present opportunities for long-term investors, however. M&G’s Multi-Asset team will be carefully watching for buying opportunities in areas where we believe assets are being sold off too aggressively as a result of this news event.
While the referendum is of course a significant development, investors should be wary of arriving at simplified conclusions. The UK’s vote does not outstrip the fundamentals of the global economic outlook. What’s more important than where we are at the end of today is where we are in a month or a year’s time.