Beyond Brexit: The investing implications
This week’s chart helps explain why we’ve updated our asset views following the British vote to exit the European Union (EU) . Political uncertainty has increased in the wake of the Brexit news, as the chart below shows, and we expect elevated uncertainty to continue for some time.
The U.K. prime-minister position is open, a Scottish independence referendum is possible and Brexit negotiation will likely take at least two years. The imminent risk of other EU exits is low, we believe, but key political votes occur in Italy, France and Germany over the next 15 months , and in the United States in November.
In addition to heightened political uncertainty, we also see more modest global growth ahead. We have trimmed our global growth expectations, and now expect a modest slowdown over the next 12 months. We see risk of a U.K. recession and European slowdown, as Brexit uncertainties weigh on sentiment. Our new BlackRock Macro GPS “nowcasting” indicator suggests Brexit-related uncertainty has already started to negatively impact U.K. and global economic growth. We see limited direct economic impact on the United States., developed Asia and emerging markets (EMs), but increased downside risks.
We expect lower rates too, with the Bank of England set to cut interest rates soon, U.S. rates on hold and potential for further quantitative easing in the United Kingdom, eurozone and Japan. We believe there’s limited scope for monetary policy to reflate the global economy, however, and much-needed fiscal stimulus and structural reform progress looks unlikely over the coming months.
So how have we updated our asset views in response? We have downgraded European stocks to underweight, and hold a negative view of the eurozone banking sector. We have a preference for income, and have upgraded U.S. credit and EM debt to overweight. We like U.S. investment-grade credit, hard-currency EM debt, stocks in selected EMs and global quality and dividend growth stocks. The bottom line: Overall, in today’s uncertain, low-growth environment, we prefer credit to equity and believe exposure to gold and alternatives as diversifiers makes sense. Read more market insights in my Weekly Commentary .
Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog .
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