Erste Asset Management Investment Blog

Brexit-Referendum – a Non-Event?

Brexit-Referendum – a Non-Event?
(c) iStock Photo

Was the decision by the UK to leave the EU a non-event? Globally speaking, share prices have increased, the spreads for default risk have narrowed on many markets, and the UK central bank, i.e. the Bank of England, did not cut its key-lending rate.

Good growth rate

The economic indicators continue to suggest real economic growth of 2 to 2.5% globally. While, from a historic perspective, the growth rate is below average, in view of the disadvantageous developments such as falling productivity growth, an ageing population, weak world trade, and the pressure to deleverage, this bandwidth can actually be regarded as good.

Positive data surprises

The preliminary global purchasing managers indices for the service sector decreased in July, but the one for the manufacturing sector increased. Also, the data surprises are remarkably positive in most developed economies. This means that the actual growth rates of indicators such as retail sales, industrial production, and employment have exceeded estimates. The economic indicators in China suggest that the stimulus measures have been sufficient to facilitate the stabilisation of economic growth at 6.5%. While the economic growth rate in the Eurozone weakened from 2.4% in Q1 to 1.2%, it was still above potential growth (i.e. long-term expected average). The low yet still existing credit growth of about 2% y/y indicates the stabilisation of growth towards its potential. At a growth rate of +1.2% in Q2, the US economy failed to recover significantly from the subdued growth rate in Q1 (0.8%). The solid growth of private consumption in combination with the early drawing-down of inventories suggests a slightly higher growth rate for Q3. The limited investment activity admittedly remains a weak spot.

Brexit effects regionally limited

The immediate economic effects are regionally limited. In the UK, some survey indicators incurred a drastic fall in July. This suggests a significant decline of real economic growth of 2.4% in Q2 to zero growth in the current, third quarter. But even in the UK, not all indicators are heading South. In July, the Lloyds Bank Business Barometer bounced back from a drastic slump in June and is now only slightly below the long-term average. In the EU, worries that the sentiment in the EU might deteriorate, have not materialised. In fact, the July values for business confidence in the EU have largely increased.

End of austerity

The Brexit vote is part of the surging global anti-establishment movement. Basically, this is about isolation vs. openness. In the EU, this means an increase in centrifugal forces. With regard to EU politics, this shifts the balance from moral hazard concerns to measures taken in support of the economy. The European Commission has already announced not to fine Portugal or Spain, although their budget deficits are excessive. Almost the same is true for fiscal policy in general. The closer monetary policy gets to the frontier of its effectiveness, the more likely austerity policies will come to an end.

Defaulted loans in Italy

At the moment investors are looking at the high volume of defaulted loans and the low capital ratio in Italy. Public subsidies are only permitted when, prior to them being effected, the public sector also shoulders a part of the losses. While this sounds reasonable, one has to bear in mind that the Italian bank bonds are not only held by institutional investors such as pension funds and insurance companies, but also by “small” (retail) investors. The likelihood of a pragmatic solution has increased.

Monetary policy still effective

The effectiveness of the monetary policy has decreased, but it still exists. In reaction to the increased uncertainty in the wake of the Brexit vote, many important central banks have sent out signals that they would loosen their monetary strategy if need be. As a result, the future money market rates priced into the bonds decreased. This means that the markets were supported by a mere statement, not by an actual measure. So the central banks still have some powder, which has not been wasted prematurely.

Rate cut in the UK

The Bank of England has fuelled expectations about an actual loosening for the next monetary policy committee meeting on 4 August. At the very least, a rate cut from the current 0.5% is priced in as we speak.

Step towards helicopter money in Japan

On 29 July the Japanese central bank pointed to a, what it called, significant level of uncertainty with regard to the development of inflation. Until the next meeting of the monetary committee in September, the status quo is to be comprehensively assessed. Indeed, the rate of inflation in Japan is moving farther away from the inflation target of 2% as we speak. In June inflation (excluding food and energy, i.e. the core inflation rate) amounted to only 0.4% y/y. The probability of a further loosening with regard to quality and quantity of the bond purchases has increased. At the same time, a fiscal package will be announced shortly in Japan. This would basically mean another step towards helicopter money (i.e. the central bank permanently finances the budget deficit).

Fed in wait-and-see mode

The US Fed has assumed a wait-and-see stance and thus supported the markets. But on 27 July officials declared that the short-term risks for the economic outlook had decreased. The tendency towards, or prospect of, a rate hike this year remains in place. This step is currently priced in.

Elevated political risks

The political and geopolitical risk remains elevated: the increasing tensions in the South China Sea ; the referendum on a constitutional amendment in Italy in autumn; US presidential elections in November – the political uncertainty will remain an important influencing factor for the markets and the economic policy.

Summary and conclusion:

  1. The leading indicators suggest continued real global growth of 2 to 2.5%.
  2. The central banks have reacted to the elevated uncertainty triggered by the Brexit by assuming a wait-and-see stance and issuing expansive signals.
  3. The financial markets have digested the increased uncertainty well.
  4. This combination is (still) positive for risk assets in the short run, especially with regard to default risk (company, government, emerging markets).
  5. Investors should not become careless with regard to risk. To mention but two: commodity prices, especially oil, have been falling since the beginning of July, and the expectations of rate hikes in the USA might rise.


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 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 A summary of the investor rights is available in German and English on the website 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

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