Russell Investments: Don’t let guard down on Brexit

Russell Investments has warned investors that is too early to let their guard down with regards to Brexit, despite the palpable sense of relief from markets of its impact so far.

In its Q4 2016 investment strategy report, Wouter Sturkenboom, EMEA senior investment strategist at Russell Investments said economic pain is left in store as a result of uncertainty hanging over the UK, and he supported underweight exposure in UK equities as a “growth slowdown is still very much in place”.

Russell Investments maintains UK growth expectations at 1% for 2016 an it said the risk of a recession in the next 18 months has declined.

“As shocking as the Brexit vote was, its impact so far has been less bad than feared. Survey data on consumer and producer confidence as well as the housing sector have partly rebounded after steep initial drops. Financial markets too have recovered quickly,” Sturkenboom said.

However, Russell Investments recommends underweight UK equities, with a particular emphasis on domestically exposed stocks.

“Price momentum for equities improved over the third quarter but this was offset by overbought short-term contrarian indicators. With so much economic pain left in store and too much uncertainty hanging over the country, we continue to advocate for underweight UK equities positions in UK domestically exposed risk assets,” he said.

Sturkenboom said government bonds have continued to perform strongly on the back of BoE stimulus with the 10-year yield falling to a low of 0.52% as of August 12, 2016.

“This was a bigger drop than we expected and we think it constitutes a bit of an overshoot,” Sturkenboom said.

Nonetheless, beyond a bounce from overbought levels it continues to be hard to see yields rise much on a sustainable basis. Russell Investments maintains its range for the 10-year gilt yield at the end of 2016 at 0.8-1.4%.

“Investors should continue to keep their expectations with respect to gilt yields low and we advocate rotating away from nominal bonds into inflation-linked bonds. Inflation expectations have slowly started to pick over the quarter and as a result inflation- linked gilts have outperformed. We think this is likely to continue as the lower British pound filters into the inflation statistics going forward,” Sturkenboom said.

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