UK funds feel the Brexit effect, but FX remains best barometer
By International Adviser, 16 Jun 16
With Brexit now less than two weeks away, the volume of commentary finding its way into our sister publication Portfolio Adviser’s inbox is growing rapidly. For your convenience they have placed all the most interesting investment ideas into one place .
Asymetric credit risk – Venizelos
Although Brexit uncertainty has had some bearing on sterling credit in recent months, sterling spreads do not appear unduly concerned about the referendum outcome, said Greg Venizelos, credit strategist at AXA Investment Managers.
He added: “Sterling spreads have underperformed in relative terms amid developed market credit in the rally since February, but not by much. The fact that sterling spreads are wider year to date is mostly due to underperformance in January’s bear market. Moreover, sterling spreads have matched the rally in the US dollars and euro spreads following the ECB’s CSPP announcement and even outperformed euro spreads in May, as heavy supply weighed on euro credit.”
While the strong recovery since March should not surprise, given the geographical proximity of sterling credit and its superior yield when compared to euro credit, Venizelos said that sterling credit is less vulnerable to swings in sentiment because it is predominantly held by domestic investors and institutions.
“The turn in polls in favour of remain also contributed to the strength in sterling credit spreads. One caveat worth making here is that the ‘buy and hold’ nature of the sterling credit market lends itself to tight trading liquidity and even a limited degree of selling could have a notable impact on pricing,” he said.
“Spread correlations within DM credit corroborate the resilience of sterling credit ahead of the 23 June referendum,” added Venizelos. “Spread correlations between US dollar, euro and sterling credit indices have risen steadily since mid-2015, suggesting little Brexit-specific deviation in sterling credit from the macro factors driving global credit.”
“The downside of this resilience is the asymmetry of risk facing sterling credit post referendum: the potential for sterling credit to tighten substantially and/or to outperform other credit markets upon a ‘remain’ outcome is limited, whereas the potential to widen and/or underperform is material, with the added hazard that its long duration would amplify losses,” he noted.
Tags: Axa | Brexit | Hargreaves Lansdown | Lipper | Neil Woodford
