The economic implications of the Brexit vote are worrying investors, but as this selection of comments shows, some wealth managers are seeking opportunities.

As investors continue to digest the impact of Brexit, what sort of positive opportunities are there? While much of the tone about the vote has been understandably nervous, and negative, there are upsides, perhaps, to be considered. A number of the comments below look at what opportunities there might be, and how investors should be positioned. 

ABN AMRO Private Banking
The UK’s decision to leave the EU is no reason for ABN AMRO Private Banking to make any drastic changes to its equity policy. "It’s senseless to sell equities at fire-sale prices amid the commotion," says Didier Duret, chief investment officer. "It is mainly driven by political lack of visibility right after the vote to leave the EU. Visibility will come as the UK and EU leaders have to agree on a workable road map for the UK to exit. The consequences of the Brexit decision will probably only become clear in the long term.

"There’s no point in adjusting the equity portfolio at this point, even given the many uncertainties at play. Plus, prices already plummeted the day after the referendum. We expect corporate profits to rise again in the year ahead," he added.

Overweight cash and slight overweight in equities
The bank has taken a series of steps to reduce risk such as a reduction in equities (now slightly overweight) in April, a reallocation of European equities into US equities and an increase in the cash position and a reduction of peripheral bonds. The market conditions are volatile as the exit might stay chaotic with no resolution with a recession starting to be priced in. The political leaders will define the way forward in the coming days.

ABN AMRO attributes more chance to an orderly exit than a disordely scenario. It is the bank’s recommendation for the moment to wait for political clarification before action and redeploying cash into risk assets or rebalance assets.

Active duration policy
With bond yields at extremely low levels, the bank is maintaining a heavily underweight position in bonds. Given the uncertain situation, the private bank expects bond markets to remain volatile for some time and is therefore pursuing an active duration policy within its (underweight) position in government bonds. "If interest rates rise, we will reduce the duration of the portfolio, as shorter durations are less sensitive to rate increases than are longer durations. If interest rates fall, we will do the opposite," it said.

Spanish bonds sold
The bank has slightly reduced its position in government bonds, mainly by selling Spanish bonds, and has increased its already overweight position in high-grade European corporate bonds.

Lombard Odier Darier Hentsch
In our view, emerging Asia has ample room to cope with the negative fallout of the UK’s vote to leave the European Union. While the market sell-off following the “Brexit” vote penalised Asian assets and currencies on Friday, it was, in retrospect, more muted than the price action seen in European risk assets on the same day. We believe that this reflects the rational assessment by investors that emerging Asia is uniquely positioned to withstand shocks stemming from European politics. We share this view for four reasons.

First, emerging Asia’s economic exposures to the UK is not that large. In theory, emerging Asian economies have the option to start negotiating new trade deals with the UK regardless of the country’s exit process with the EU, but it is likely that they will wait for some clarity on the question. While the accidental reversion to WTO tariffs could be harmful at the margin, the low levels of tariff mean that the negative impact on bilateral trade will not be material. More importantly, emerging Asia’s exports to the UK pale in comparison to those to their regional neighbours such as China.

Second, financial linkage to the UK has been reduced over last few years. Despite the headline rise in UK banks’ consolidated claims on their emerging Asian counterparties since the global financial crisis, their ratios to emerging Asian economies’ GDP have either fallen or remained at low levels due to conservative balance sheet management by the banks themselves or outright deleveraging in local markets. We note that the restraint has been even more stark among European banks since the eurozone debt crisis of 2010-11. Further acceleration in capital outflows could be a risk, but this is mitigated by the fact that emerging Asia has already borne the brunt of outflows last year.

Third, the likely dovish reaction of major central banks could help emerging Asian assets significantly. Investors’ extreme reaction to the result of the UK referendum has already lowered markets’ expectation of long-term inflation down to the very depressed levels seen in late-February (e.g. US 10-year breakeven rate is now 1.4 per cent). We expect the US Federal Reserve to start guiding markets to an extended pause until December and rely on weak US dollar as a way to shore up markets’ inflation expectation. The Bank of Japan is also likely to act later this month. Such measures could weaken safe haven flows.

Fourth, emerging Asian governments have substantial scope to increase monetary or fiscal support for their economies. In China, further deterioration in external environment could nudge authorities toward the full utilisation of credit and fiscal targets set out by the NPC. Although Beijing has been sending a cautious note on additional stimuli, extreme shocks from abroad will be good enough excuse for such measures. Korea and Taiwan will have stronger motivation to launch a new round of rate cuts as their policy targets (CPI inflation in Korea and money aggregate in Taiwan) are already being imperilled again in the panicky environment. In Singapore, the Monetary Authority of Singapore will retain an option to re-centre its currency benchmark index at a lower level. Finally in South Asia, sharply declining oil price and the prospect of rate hike delay in the US should provide the appropriate basis for extended pause or even a few more rate cuts in India, Indonesia, Thailand, and Philippines as the downside risks to their inflation targets will grow and create more space for intervention.  

In sum, we believe that Asian markets will demonstrate their resilience against the new shocks from Europe and markets. They have manageably low macro and financial linkages to the UK, and the scope for policy intervention will be higher. We are therefore firmly biased to maintain our exposures to the region (in both equity and fixed income) relative to our allocation benchmarks.

Mark Haefele, Global CIO, UBS Wealth Management

Equities 

US equities

Move since referendum result: -4 per cent

Forecast upside by year end: +5-8 per cent

The US has limited direct export exposure to the UK (3 per cent). US companies generate about two-thirds of their revenues domestically and should benefit from the strength of the US consumer. Solid labour income and the ongoing improvement in the housing market should support consumption, and the Federal Reserve is likely to keep policy relatively loose, so company refinancing costs should remain low. We will monitor US dollar strength, but, on balance, we see the fall in US equities as an opportunity, and remain overweight them in our global tactical asset allocation. We particularly favour stocks executing buybacks and/or paying healthy dividends.

Buy dividend stocks

Europe:

Move since referendum result: -1 per cent vs eurozone equities

Forecast upside by year end: +5 per cent vs eurozone equities

Stocks across Europe were hit by the UK's vote to leave the EU, including more defensive stocks that pay dividends. The 12-month-forward dividend yield on the MSCI EMU index is now 4 per cent, 3.9 per cent higher than German government bonds and close to an all-time high. We think that companies able to grow dividends should offer better total returns than the overall eurozone equity market.

---

Asia:
Move since referendum result: -2 per cent

Forecast upside by year end: +5-8 per cent

APAC growth is only marginally affected by Brexit, and Asian equities are relatively cheap at present. Stocks with bond-like characteristics – high yields, low earnings growth risk, and strong free-cash flow – can perform well in an uncertain environment, in our view. We focus on high-dividend stocks in markets with the lowest government bond yields: Hong Kong, Singapore, China and Thailand.

Buy UK real estate versus European real estate stocks

Move since referendum result: -19 per cent for UK versus -3.5 per cent for Europe ex-UK

Forecast upside by year end: Low double digit total return

UK real estate stocks have priced in a horror scenario. Values look close to historical extremes: spreads are close to historic high, and stock price implies a 25 per cent discount to asset value. And there are a number of factors that might mitigate the impact of UK leaving the EU: (1) exposure to financial tenants is low, (2) sterling declines would make pricing more attractive for international buyers, (3) BoE will likely cut rates, (4) Brexit might reduce the appetite for speculative office development and limit future supply, and (5) leverage levels are low. Although we see upside to year-end, continuing uncertainties mean investors should be prepared to hold for one-and-a-half to two years if necessary.

Buy 2021 Eurostoxx dividend futures

Move since referendum result: -10 per cent

Forecast upside by year end: +4-7 per cent

Eurozone dividend futures were already "cheap" before the UK vote, pricing a 27 per cent drop in dividend payments from major eurozone companies by 2021. Now, futures are pricing a fall of more than 35 per cent. For context, this would suggest a larger collapse in dividend payments than occurred after the Great Financial Crisis. Even if we assume that all financial companies will cut their dividends to zero, and that there is no dividend growth for any other Euro Stoxx 50 company for five years, eurozone dividend futures are still well priced.

Fixed income

Buy European high yield credit

Move since referendum result : -1.5 per cent

Forecast upside by year end: +3-4 per cent

Direct exposure to the UK is relatively limited, and easy monetary policy and potential emergency measures from the European Central Bank (ECB) should help keep systematic concerns limited. We anticipate default rates remaining low (circa 2 per cent) thanks to modest economic growth and low corporate funding costs, and the ECB buying corporate bonds supports euro credit markets directly. After the sell-off, the yield is 5 per cent.

Buy gold miners' bonds

Move since referendum result: Slightly up

Forecast upside by year end: +8 per cent.

Gold miners should experience higher profitability due to a rising gold price and lower, mostly EM-denominated, costs. Bonds have an average spread of 4 per cent, and due to limited bond maturities in 2016-18, cash accumulated will be used to tender for outstanding bonds. Bonds will likely benefit from safe-haven demand for gold itself, and we are bullish on the Q2 earnings season.

Buy Asian bank tier two subordinated bonds

Move since referendum result: unchanged

We expect demand and technical support to be strong for Asian banks' tier two bonds due to a lack of supply and strong demand from Chinese onshore buyers. Current yield to maturity for Asian tier two bonds is approximately 3.6-3.8 per cent, and tier two bank bonds feature attractive valuations with a two times subordinated/senior spread ratio relative to senior bonds. Asian bank tier two bonds are mostly BBB/BBB- rated.