DNB| Luxemburg, 13.07.2016.
What we did not expect, but feared, did actually happen last week. The UK has chosen to leave the EU. Fear of Brexit was one of the reasons why we recommended underweight equities in the June market view. The referendum outcome contributes to underweight equities also in July.
The political risk has increased
The fear is that voters in other EU countries, where discontent with the union also is significant, will demand additional referendums. This creates uncertainty about economic growth, which results in greater volatility in financial markets.
We do not believe the economic consequences of Brexit are a major threat to global growth. But markets dislike this uncertainty, and it puts a damper on investors risk appetite.
Too early to buy
In June market view we addressed a risk for stock market correction as the markets had been strong despite weak earnings. This argument still applies. The markets have not fallen enough that we think it is cheap enough to buy equities.
We reduce exposure to European equities and global Financials
Europe is most vulnerable to negative spillover from Brexit and we therefore downgrade European equities from overweight to neutral.
Higher volatility and renewed growth uncertainty postpones potential rate hikes from Fed. Increased asset purchases by central banks will help to keep interest rates low. Flatter yield curves are challenging for banks’ earnings, and the rest of the financial sector (insurance & real estate) appears expensive. We therefore downgrade financials from neutral to underweight.
The attached matrix shows recommended short-term deviations from a balanced portfolio divided into several asset classes. The deviations from the long-term distribution should not constitute more than 5 to 15 per cent of the total portfolio to prevent excessive short-term risk-taking. The scale must be seen in the context of investors’ risk willingness and investment horizon.
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