“As a result of Brexit, uncertainty is high. The likelihood of a European Union (EU) break-up has increased considerably since the United Kingdom’s ‘leave’ vote. Similar referendums in other EU countries such as Italy, the Netherlands and France could have the same outcome.”
“The UK has to renegotiate the best possible trade agreements for itself, while the EU plays hardball as it attempts to discourage further referendums by other EU member states. Negotiations will be long and drawn out.” says Kokkie Kooyman, portfolio manager: Sanlam Global Financial Fund.
He adds that with its leadership and the country divided, Britain will undergo a period of strife and a battle for leadership. “In most developed markets, the frustration of blue-collar workers with politicians and the increased competition from immigration will ensure continued political volatility. Thus, the probability of a weaker pound and a recession lie ahead.”
“The initial large sell-off was brought about by fund managers reducing their equity exposure, specifically UK (where they were overweight), Europe and also United States bank positions,” shares Kooyman. “But as investors get more worried about the outlook for developed markets the sell-off is continuing.”
Speaking of the US, Kooyman believes that it is unlikely that the electorate will learn from the Brexit vote with Donald Trump already fighting his election on a trade protection basis, stating: “We’ll protect your jobs against the Chinese”. He has threatened to withdraw from the North American Free Trade Agreement and has vowed to label China a currency manipulator and impose punitive tariffs on Chinese goods.
“Brexit could trigger a move away from globalisation, restricting free trade, pushing up costs, restricting the optimal allocation of capital and driving down returns on capital,” warns Kooyman.
With all of this uncertainty, Denker Capital’s Neal Smith, recommends that investors put a percentage of their portfolio into emerging markets over the long term as this has had the dual benefit of increasing returns as well as decreasing risk. “Although emerging markets generally remain somewhat more volatile than developed markets, the diversification of risk makes up for that.”
“Year-to-date, emerging markets as a category have outperformed developed markets and the extent of this outperformance is set to increase further with time. Structural drivers of this outperformance include the fact that 82% of the world’s population lives in this region, it has 75% of all land and 63% of all natural resources. In addition, there are powerful trends at play in emerging markets such as urbanisation that will continue to support their growth. Investors seem to be reassessing the risk associated with investing in emerging markets given their performance. Contrary to common wisdom, the case can be made that emerging markets are now more predictable than the developed countries.”
He adds, “Emerging market valuations are looking particularly attractive and they are under-owned. Their currencies have been under pressure the last five years, reflecting global investor pessimism towards this asset class. Debt levels in many emerging market countries are low compared to their developed market peers. On top of this, many countries such as India and Indonesia have their own internal growth dynamics and positive reform agendas.”
Emerging markets are cheap, unloved and are very under-owned by global investors, and have possibly started their next cycle of outperformance,” concludes Smith.
