Erste Asset Management Investment Blog

Brexit or secular stagnation?

Brexit or secular stagnation?
© Fotolia.de

Risk-averse markets
The classic indicators on the capital market suggest rising risk with respect to the economy and risky assets. Spreads have widened, and the yield differential between long-term and short-term government bonds has fallen; volatility has increased. Also, the inflation rate priced in has decreased, the Japanese yen and the Swiss franc have appreciated, and the gold price has risen. The decline in the yields of safe government bonds is conspicuous, given that the yield of the German benchmark 10Y government bond is currently at -3bps.

Brexit uncertainty
The volatility of at-the-money options with a maturity of one month on the British pound to the euro is at 24%, which is one indicator suggesting a crisis. This value was last seen in the crisis year of 2008. As a matter of fact, some surveys have been published in the past days in relation to the referendum in the UK on 23 June that have seen the supporters of a Brexit take a slight lead. In line with this scenario, the yield differential between UK gilts, which pay higher yields, and German and Japanese government bonds has fallen, while the one between US Treasury bonds and UK gilts has widened. This suggests that UK gilts are the drivers for yield declines.

Cautious Fed
The imminent Brexit referendum does not only affect the capital markets. Within the framework of the meeting of the FOMC, the chairwoman of the US Fed, Janet Yellen, addressed the Brexit issue as one of the parameters in the central bank’s decision-making process. Unsurprisingly, the bandwidth of the Fed funds rate was left at 0.25 – 0.50%.

Fallen rate projections
There are also other important strands of development aside from the uncertainty caused by the Brexit referendum. The outlook for the Fed funds rate has seen a significant revision. The projection for the rate remained unchanged for the end of 2016 at 0.9%, but the forecasts for 2017 and 2018 were revised downward from 1.9% to 1.6% and from 3.0% to 2.4%, respectively. The estimate for the average Fed funds rate was reduced as well (from 3.3% to 3.0%). The Fed thus continues to display readiness to increase the rate as soon as the environment is conducive to this step. The estimate for economic growth was reduced by a bit, while the one for inflation was raised. The data imply that full employment has been achieved and that productivity will not improve as substantially as recently assumed.

Fallen inflation expectations
The hurdles for rate hikes have become higher yet again. The most important statement in the press release by the Fed was that only most of the surveys for the long-term inflation expectations were unchanged anymore. This may be a result of the report by the University of Michigan published last week, according to which the long-term inflation expectations of consumers have fallen to an all-time-low of 2.3% in June. Firmly entrenched inflation expectations are a crucial prerequisite for the avoidance of a Japan scenario.

Conclusion
The markets are afraid of a negative shock to the global economy and the financial markets in the case of a Brexit. The uncertainty premium pushes the yield of risk-free government bonds down and dampens risky assets. In the “Bremain” (the UK remains in the EU) case, this premium will decline a bit and support the risky asset classes at the expense of credit-safe government bonds.

In addition to the Brexit issue, there are developments that suggest sustainably low levels of interest rates and yields. The assets prices have been gradually moving closer to the so-called liquidity trap, where on low interest levels there is no difference between the money market and the (safe) capital market, as well as to the scenario of “secular stagnation”, which requires negative interest rates for the economy to grow.

 

RESPOND TO THE ARTICLE

Legal disclaimer

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. The language of communication of the sales offices is German and the languages of communication of the Management Company also include English.

The prospectus for UCITS funds (including any amendments) is prepared and published in accordance with the provisions of the InvFG 2011 as amended. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in conjunction with the InvFG 2011.

The currently valid versions of the prospectus, the Information for Investors pursuant to § 21 AIFMG, and the key information document can be found on the website www.erste-am.com under “Mandatory publications” and can be obtained free of charge by interested investors at the offices of the Management Company and at the offices of the depositary bank. The exact date of the most recent publication of the prospectus, the languages in which the key information document is available, and any other locations where the documents can be obtained are indicated on the website www.erste-am.com. A summary of the investor rights is available in German and English on the website www.erste-am.com/investor-rights and can also be obtained from the Management Company.

The Management Company can decide to suspend the provisions it has taken for the sale of unit certificates in other countries in accordance with the regulatory requirements.

Note: You are about to purchase a product that may be difficult to understand. We recommend that you read the indicated fund documents before making an investment decision. In addition to the locations listed above, you can obtain these documents free of charge at the offices of the referring Sparkassen bank and the offices of Erste Bank der oesterreichischen Sparkassen AG. You can also access these documents electronically at www.erste-am.com.

N.B.: The performance scenarios listed in the key information document are based on a calculation method that is specified in an EU regulation. The future market development cannot be accurately predicted. The depicted performance scenarios merely present potential earnings, but are based on the earnings in the recent past. The actual earnings may be lower than indicated. Our analyses and conclusions are general in nature and do not take into account the individual characteristics of our investors in terms of earnings, taxation, experience and knowledge, investment objective, financial position, capacity for loss, and risk tolerance.

Please note: Past performance is not a reliable indicator of the future performance of a fund. Investments in securities entail risks in addition to the opportunities presented here. The value of units and their earnings can rise and fall. Changes in exchange rates can also have a positive or negative effect on the value of an investment. For this reason, you may receive less than your originally invested amount when you redeem your units. Persons who are interested in purchasing units in investment funds are advised to read the current fund prospectus(es) and the Information for Investors pursuant to § 21 AIFMG, especially the risk notices they contain, before making an investment decision. If the fund currency is different than the investor’s home currency, changes in the relevant exchange rate can positively or negatively influence the value of the investment and the amount of the costs associated with the fund in the home currency.

We are not permitted to directly or indirectly offer, sell, transfer, or deliver this financial product to natural or legal persons whose place of residence or domicile is located in a country where this is legally prohibited. In this case, we may not provide any product information, either.

Please consult the corresponding information in the fund prospectus and the Information for Investors pursuant to § 21 AIFMG for restrictions on the sale of the fund to American or Russian citizens.

It is expressly noted that this communication does not provide any investment recommendations, but only expresses our current market assessment. Thus, this communication is not a substitute for investment advice, does not take into account the legal regulations aimed at promoting the independence of financial analyses, and is not subject to a prohibition on trading following the distribution of financial analyses.

This document does not represent a sales activity of the Management Company and therefore may not be construed as an offer for the purchase or sale of financial or investment instruments.

Erste Asset Management GmbH is affiliated with the referring Sparkassen banks and Erste Bank.

Please also read the “Information about us and our securities services” published by your bank.

Subject to misprints and errors.

Share post:
Exit mobile version