Investing in a post-Brexit world

Brexit should not lead to a repeat of the financial crisis of 2007-2008. So argue Pictet analysts and economists in the July issue of Perspectives. Central banks are better prepared and banks are less leveraged. In the last resort, the European Central Bank can be expected to step in again should financial stress noticeably increase in the weeks ahead. Longer term, an ideal post-Brexit scenario for European financial markets would be a renewed push for European integration, say Pictet economists. But with general elections coming up in France, Germany and the Netherlands, politicians are likely to tread very cautiously in this regard. While Pictet’s economists have had to cut their growth forecasts for the UK and the eurozone as a result of Brexit, they see hardly any direct impact on the US economy. Yet Brexit could tighten financial conditions in the US and prolong the US Federal Reserve’s long-standing cautiousness.

What of the implications of Brexit for individual asset classes? Brexit may well have an impact on elevated equity valuations. As for fixed income, yields on safe-haven bonds like US Treasuries and German Bunds could stay low for a while and recent trading points to a period of underperformance for European corporate bonds versus their US equivalents. Understandably, precious metals such as gold and silver have done well out of the uncertainties. But perhaps more interestingly, hedge funds have generally proved resilient, with tactical positioning helping managers to navigate the post-Brexit volatility.

Overall, the message is that the Brexit referendum has opened up a period of uncertainty for risk markets, making the building portfolios as decorrelated as possible from the greatest sources of risk even more important. With volatility high and returns low, this could be a period when quantitative analysis comes into its own. A feature in the July issue of Perspectives argues that by telling us about sources of return past, present and future, quantitative analysis can anticipate potential sources of short- and long-term return.

With studies showing that median wages have stagnated at best and inequalities have been growing, in Europe just as in the US, Pictet Wealth Management’s chief investment officer, César Pérez Ruiz, believes greater efforts are needed to tackle the lack of income growth among low earners. “After years of austerity,” he writes, “more could undoubtedly be done to modernise education, to encourage entrepreneurship and innovation, and to raise capital spending.”