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Markets reacted strongly to Brexit, with no systemic crisis from our views for now

27 June 2016

Britons have finally decided to exit the European Union. Given that bookmakers were still largely pricing that the UK would remain in the UE the previous night, this Friday has logically been a very ugly day on financial markets.

At the opening, here was what the situation looked like:

  • -12% Euro Area equities
  • -20% Euro Area banks
  • -5% S&P 500 (limit down on the day)
  • -9% Japanese equities and EM
  • -30bps core fixed income bond yields

In a nutshell, this was a bloodbath and the worst single day in Euro equity markets.

What do we think about Brexit implications and how are we going to manage the upcoming days and weeks?

  • Nobody has a clear view about macro implications over the medium and long term. It will depend on various political decisions that we do not control. That being said, UK exiting EU should have a marginal impact on global growth and limited on European growth. Some studies even consider it could have a positive impact on the Euro Area.
  • Policy makers and Central banks are on our side and everyone wants consequences to be as minimal as possible. Angela Merkel’s speech today heads in this direction and many central banks are ready to intervene.
  • Brexit is not a surprise for anybody. All asset managers had nine months to prepare, modify their allocation, perform stress tests, etc. So obviously, the outcome is a surprise, but the environment was ready to absorb this event.
  • The consequence is that investors have today a low exposure to equities and risky assets as a whole, with high cash buffers in their books.
  • In our view, the risk that Brexit morphs into a systemic crisis is low. We are not in a Lehman Brothers type of context.

However, it is likely that markets will be volatile in the coming days and weeks. We will keep a very liquid portfolio and a constrained risk budget. Our risk will evolve rapidly depending on upcoming news/announcements.

But the way, we think, is risk taking. Apart from Brexit, the bulk of our indicators is today very well positioned.

  • Equity flows have been negative for the last three months
  • Positioning is at its lowest since 2011
  • Stress is huge
  • Brexit risk has been at the core of all discussions for months
  • And the Euro area economy is getting better if we take apart negative impact from Brexit

La Française’s Essentiel Markets brings you an insightful analysis of the latest financial news by François Rimeu, Head of Total Return at La Française Asset Management.

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