Investment Desk Bulletin

28 June 2016

Brexit: The “What if” turns into the “What now”

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By Pau Morilla-Giner

This week's IDB is a collective effort from the Investment Desk. Our Chief Investment Officer, Pau Morilla-Giner, Head of Equities, Roger Jones and Head of Fixed Income, Sanjay Joshi present their macro views and the impact on Financials post the Brexit vote.


- The UK faces a number of issues but a few stand out: Trading relationship with key partners, risk of lower business investment and foreign direct investment (with a residual concern over an outflow), and a weakening currency. The economy had already weakened in the run-up to the vote and the risk of a further slow-down has increased. A recession is not the central scenario but over the next couple of years the growth rate could be 2-2.5% lower than if the vote had gone the other way.

- Despite the recent market this is not be a re-run of the Lehman Brothers collapse. The financial system is now a lot more secure and stable than back then.


- Volatility in US and European stocks have spiked over the last couple of days with sizable shifts from domestic companies with large exposures to the UK market to the ‘safe havens’ such as Gold and Silver, which we should expect to continue over the next three months.

- In relation to London & Capital's equity strategies, these have stood up well against their benchmarks. We retain a cautious approach and focus on multi-national companies with diverse earning streams.

Fixed Income

- There was a flight to quality across the major markets, with government bond yields falling significantly. At the same time risk aversion was highlighted by the widening of credit spreads. Financial bonds have been in the focus as these are highly correlated with the volatility of the equity market, but generally the fall in bond prices was relatively muted and far less than banks stocks.

- It should be noted that the banks are now in a much stronger position in comparison to 2008: Common Equity Tier 1 ratios are significantly higher, risk-weighted assets are lower and liquidity levels are high. Additionally, Central Banks are continuing to support the markets by providing liquidity.

- Over the past month, London & Capital fixed income strategies have become more defensive through increasing duration, adding flight to quality assets and trimming correlated positions. During periods of uncertainty, low economic growth and inflation, and zero interest we will continue to focus on high quality assets, financials and selective corporate bonds all of which have aided our ability to manage volatility.

Please click here to view the presentation.