Brexit vote could have lessons for US markets

Brexit vote could have lessons for US markets

Brexit has several lessons for the US, not least that uncertainty will shake markets, but short-term shocks should not affect long-term decisions, analysts have claimed.

In a note from Bank of America Merrill Lynch, the UK's recent vote to Brexit - and the ensuing problems in the stockmarket and especially the slide in sterling - has lessons for the US.


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The note said: "Brexit has shown us that polls and market probabilities can be wrong, suggesting caution in interpreting such measures.

"However, that doesn't mean they should be simply cast aside. Big changes to the status quo typically create greater uncertainty. These uncertainty shocks matter, but are difficult to measure. They typically work through deferred investment spending."

The timing and size of such shocks, however, is hard to predict and although uncertainty shocks can "hamper growth" by leading to delays in "spending or investment decisions by households and firms", long-term investors should not be spooked by what happens in the short-term.

However, opinion among advisers taking part in FTAdvantage's latest poll on whether the US election fever would affect the UK stock market has been nearly evenly divided.

According to the poll, 41 per cent thought the UK market would show signs of nervousness in the lead-up to the election on 8 November.

Some 43 per cent believed the market would remain relatively steady. 

However, remaining focused on the long-term and maintaining a sanguine approach to the UK stock market should not mean one does nothing to hedge portfolios. 

As the US enters into the final stages of election campaigning, it is important, according to Luca Paolini of Pictet Asset Management, to trim portfolios tactically without making huge, sweeping changes to the investment strategy.

He said, “We remain overweight on the UK as the economy continues to show surprising resilience in the wake of the Brexit referendum. However, the government’s autumn statement could yet raise concerns about the coming year."

When it comes to the US, and its effect on global markets such as the UK, Mr Paolini said: “In terms of sectors, we have raised healthcare to an overweight.

"This represents both a slight dialling down of our cyclical exposure and a more explicit hedge against a [Donald] Trump victory in the US presidential election. The sector has been under a cloud for some months as [Hillary] Clinton is seen as quite hawkish on drug company pricing."

He also favours US fixed income and more defensive stocks in the UK and elsewhere as a hedge against political uncertainty.

Mr Paolini added: "With the Fed apparently destined to hike interest rates in December and the ECB still in monetary easing mode, it might seem that European fixed income markets offer more attractive investment opportunities than their US counterparts. In our view, the opposite is true.

“The yield differential between US 10-year Treasuries and German Bunds is starkly at odds with the economic reality. Not only is Europe growing at a faster pace than the US, but investors are underestimating the risk of a tapering of the ECB's bond buying programme sometime next year.