Brexit from fund selectors’ perspective

Fund selectors react to the Brexit referendum’s outcome.

Pierre Bermond, managing partner of EOS Allocations, assesses financial markets have once again proved that one has to beware of an unlikely but not impossible event.

Brexit opens a breach in the building of Europe, he says.

But if Bermond assesses the risk exists to see other countries following Britain’s path, he argues Brexit is first an issue for British population and that the impact on global economy will be limited.

Bermond explains that markets’ slump recorded after the UK voted for leaving the EU will have a beneficial impact on stocks’ valuations that were too expensive and thus will lower. He believes markets could go down more over the coming weeks.

“It will depend of central banks and politics. However, it is clearly too late to leave the markets,” Bermond says.

Bermond highlights a new drop would be an opportunity to jump into the markets. A market selling all stocks the same way would further bring opportunities to active fund managers, he suggests.

EOS Allocations’ managing partner says positions in all profiled portfolios of the firm are defensive and that they will show resistance to markets’ drop.

Eddy Vanwittembergh, fund of fund manager at Merit Capital, says he is not so worried by the Brexit referendum’s outcome because he is overweight in high qualified US companies and does not have exposure to European banks.

Etienne de Merlis, chief investment officer at Signia Wealth commented : “Last night’s vote to leave the EU has taken financial markets by surprise. The past few days have seen markets rise on the back of fresh optimism that the “remain campaign” would be in the lead.  Few expected a Leave outcome but in the past week, we have replaced some of our equity exposure with call options, mitigating some of our downside risk further.

“The focus will now shift from economic to political issues, the PM’s resignation this morning as well as Scottish and Irish comments highlight this. Elections will maintain the uncertainty, not only over the leadership of the country, but also on the way the negotiations to leave will be conducted. European elections being held this weekend in Spain and next year in France and Germany will add to the political instability with non-mainstream parties possibly gaining traction.

“It is difficult to assess the impact this will have on the economy: some investment banks now forecast two rate cuts by the Bank of England, and while it can be debated whether a lower currency is good for the economy, there are a few things to note.  Importantly central banks will be providing more liquidity to the markets, which is a good thing. However in the current low interest rates environment, it will put additional pressure on bank stocks, which represent over 20% of both the FTSE 100 and EuroSTOXX 50.

“With a period of uncertainty about trade, tariffs and high currency volatility, it is likely that industrial or investments projects into the UK will be delayed, thus adding pressure to growth in the UK and Europe.  With all uncertainties remaining for the near future, it is likely that risk assets will remain under pressure, and safe heaven assets remain an asset to be owned.

“Our current positioning with high levels of cash gives us the flexibility to start buying again at lower prices, but in our opinion, it is too soon to tell.”

According to Isabel Azoulay, head of Investment Advisory at Lutetia Capital, the Brexit is the starting point of a process that will remain long and complicated to manage for major banks.

She says a Brexit is not favourable to traditional and long-only asset management as the Brexit referendum’s outcome is creating uncertainty over the mid-term and is likely to maintain volatility at higher levels.

However she observes that it could benefit to alternative strategies that can exploit more attractive arbitrage opportunities.

Lutetia Capital having a focus on merger arbitrage strategies, Azoulay says the firm expects spreads to widen moderately over the short run. She adds it would form an opportunity to strengthen exposure to most secured yields. Having no direct correlation with markets’ events is an advantage in that context, Azoulay says.

Pierre Bismuth, CEO of Myria AM, assesses nobody can predict the impact of a Brexit but he reminds that the 2015’s Grexit referendum led to a shock wave in financial markets which then recovered in a very short period of time.

He also refers to the first Greek debt crisis in 2010 that hit markets with high volatility before they ended the year on a positive note after recording a 10-15% drop.

Positions taken by Myria AM in June shall be managed dynamically as it is very likely that the markets will react in an exaggerate way, Bismuth estimates.

He highlights that the firm hedged its portfolios at various levels before Brexit by keeping long exposure on US dollar against euro, trading call options on S&P 500 and selling futures on FTSE 100.

Myria AM’s CEO says that the real exit of United Kingdom from the EU would not be effective before 2019 but recalls that popular referendums on Europe are often declared invalid by local parliaments.

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