Post-Brexit Rally May Signal ComplacencyLearn more about this firm
Election years are always fun. Complex, emotional, exhausting — but fun. The news cycle can cause a certain myopia, however, and investors with longer-term goals would do well to consider the U.S. elections in a broader context. The BMO Multi-Asset Solutions Team’s disciplined process is to develop views through a framework of valuation, the economy and policy (both monetary and fiscal) around the world. We are positioned with a slight overweight to equities versus fixed income, and within equities an overweight to U.S. equities versus international developed markets. Within fixed income, we prefer high-yield bonds to core bonds, though we are reassessing this preference daily. Here is a look at what is driving these views looking into the fourth quarter of 2016.
Post-Brexit rally may signal complacency
In the uncertainty surrounding the future of the European Union, which may weigh down business confidence and investment, we see risks that have not been fully priced in by the markets and maintain a slight underweight to European equities.
After an initial shock following June’s Brexit vote, markets recovered and performed well over the third quarter. Equities on the whole have done well, and some may be surprised to see the U.K. leading the pack. There may be some complacency behind this, particularly in the U.K. and Europe, where substantial policy risk remains. For one, the U.K.’s exit from the European Union has barely begun. Theresa May, the newly elected British prime minister, has been quiet on the details beyond plans to open talks in April 2017, so British voters know little about the negotiations. From what they do know, only 16% think May is doing well, according to a recent YouGov poll.
A number of populist parties also continue to gain traction across Europe, adding to policy uncertainty. Austria’s Freedom Party leads in the second round of presidential elections in December, and with the growth of France’s National Front and Germany’s Alternative for Germany parties, populist sentiments are shaping more of the national discussions on open borders, immigration and, ultimately, membership in the European Union. Spain, meanwhile, has not had an elected government all year.