Investors Unsure Where to Turn for a Brexit Safe Haven

The main victim right now has been the British pound.
By Antonia Oprita ,

The fallout from the Brexit vote is still unfolding. New -- and sometimes surprising -- consequences appear every day (such as a report today that researchers in the U.K. are saying counterparts in European Union universities are trying to pull out of joint projects, worried about funding). Perhaps the worst consequence is the fact that there is no way for investors to know when everything has been priced in.

The main victim so far has been the currency. The pound fell to a 31-year low of $1.2798 in Asian trade on Wednesday -- that's a fall of nearly 15% compared to its value before the referendum. That is well in line with the predictions of George Soros, which had been dismissed as scaremongering by pro-Brexit commentators at the time.

Sterling rallied a bit later on in Wednesday trading in London, but there is no way of knowing whether it has bottomed or will keep falling. Some analysts say this is good for exports, and this is true up to a point. However, with the U.K. importing much more than it exports, a weaker pound will mean high inflation, eroding consumer confidence even further. Anecdotally, footfall into malls has fallen and Waitrose, a high-end supermarket, reported a fall in sales following the vote.

Various pundits are trying to readjust their forecasts and expectations after the June 23 poll. Following these forecasts might shed some light into what could influence markets over the next few months -- with the big caveat that, with uncertainty running so high, it is impossible to make even slightly accurate predictions.

Gabriel Sterne, head of global macro research at Oxford Economics, said the vote made him readjust his expectations regarding various asset classes, but he does not believe the vote amounts to a Lehman-style event, as other analysts have suggested.

"Sovereign bond yield movements are supportive of the view that markets expect Brexit to be negative for growth but not systemic," he said in a recent review of the market. "The transmission to a systemic crisis would likely be via populist tendencies leading to eventual default of eurozone periphery sovereigns."

He cut his prediction for U.K. economic growth for next year by around one percentage point, forecasting a GDP advance of 1.1% next year. For eurozone growth, he reduced his forecast by more than 0.2% to 1.5% next year.

The low or negative bond yields, together with the sharp drops in equities indices, indicate reduced growth expectations for U.K. and EU, rather than systemic fears, Sterne said.

He noted that eurozone equities have fallen more than he had expected; he sees some "upside risks" in the asset class. However, the risks to the eurozone are not small: Brexit could be a catalyst for an increase in risks in the Italian banking system, and a big hit to business confidence could see business investment tumble and therefore tax revenues falling, adding to fiscal pressures.

Analysts at HSBC said that in the first half of the year, outflows from equities were the highest on record. Data analyzed by Robert Parkes, equity strategist at HSBC, show $134 billion left global equity funds in the first half, with investors taking refuge in bonds, which are perceived as safer, after the referendum.

For Parkes, the biggest risk stemming from the Brexit vote is the integrity of the European project itself. Other analysts, too, have said that Brexit could be the first domino to fall in a process that could lead to the disintegration of both the eurozone and the EU.

Parkes noted that European funds have increased exposure to sectors in which companies have sales outside of Europe as a way to deal with the fallout. This observation chimes in with another one, made by Societe Generale's Jason Daw.

"Foreign demand for emerging markets equities and bonds improved in June and early indications are that inflows are positive so far in July," Daw said in a report on emerging markets late Tuesday.

In equities, Taiwan and South Africa saw the bulk of inflows in June, while in fixed income those two countries were joined by Indonesia.

It is too early to tell, however, whether emerging markets can become a longer-term safe haven from the effects of Brexit, because the separation process is likely to take years and the economic consequences are only beginning to unfold. Favorable trade deals could boost some developing countries, whereas others could suffer due to a hit to exports and lower remittances from workers.

Being nimble and keeping up to date with events and trends can help investors actively move capital to the areas with less risk.

Here are some Real Money articles that shed light on some market areas and trends to be aware of:

Editor's Note: This article was originally published at 9 a.m. EDT on Real Money on July 6.

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