Investors urged to ‘Brexit-proof’ against rising volatility

Equity markets in the UK and US have hit record highs in the period, while on the economic side the US has increased interest rates by another 25 basis points and UK consumer price inflation jumped above the 2 per cent target for the first time since 2013. However, the second quarter sees a number of potential political headwinds, including the official start of Brexit negotiations and the French presidential election. 

Nigel Green, founder and chief executive of deVere Group, says the UK’s exit from the EU will be “one of the most complex negotiations in political history with global consequences, and as with most divorce proceedings, it is unlikely to be completely smooth sailing”. 

While the underlying fundamentals of the global equity markets remain solid, this abnormally low-volatility environment isn’t likely to persist David Lafferty, Natixis Global Asset Management

He warns investors need to ensure their portfolios are “Brexit-proofed” and prepared for three key issues: increased market volatility, further swings in sterling, and the impact of higher UK inflation and rising interest rates. 

“Inflation hit its highest level in more than three years, smashing the Bank of England’s official target [of 2 per cent]. This has raised expectations that interest rates could be hiked sooner rather than later,” Mr Green adds. 

Meanwhile, John Bilton, global head of multi-asset strategy at JPMorgan Asset Management, suggests that while the reflation trade is in its infancy, the memory of ultra-accommodative policy will continue to influence asset markets this year. 

He explains: “The world economy is enjoying its best period of co-ordinated growth since the aftermath of the financial crisis. Risk asset markets have moved to reflect this, and we certainly would not rule out some consolidation in the near term. 

“Nevertheless, our confidence in maintaining a pro-risk view over a 12-month time frame is increasing – with the qualifier that the move to a reflation phase will be progressive and gradual. Our preference is for US and emerging market equities. European equity, while cheap, is exposed to risks around the French election, so we maintain a neutral stance for now.”

In the US in recent weeks, there have been some dips in confidence as Donald Trump struggles to enact some policies. 

David Lafferty, chief market strategist at Natixis Global Asset Management, notes the market sell-off on March 21 was the first significant hiccup in the post-Trump election period, but expects many more. 

“While the underlying fundamentals of the global equity markets remain solid, this abnormally low-volatility environment isn’t likely to persist,” Mr Lafferty says. 

“The market’s dramatic run post-US election was fuelled by fiscal optimism stemming from a view that the bipartisan gridlock in Washington will wane. Markets are waking up to the reality that gridlock within the Republican party is nearly as bad as it is between Democrats and Republicans. 

“There is a showdown looming between the deficit hawks in Congress and the Trump growth agenda. Given fiscal limitations in the US, both cannot be satisfied. Investors should expect the ride to get bumpier as these cracks emerge in the Trump reflation trade.” 

Nyree Stewart is features editor at Investment Adviser