What does the Brexit mean for global equities?

The U.K. vote to exit the European Union ushers in a new era of uncertainty that is likely to persist for some time. The significance of this event cannot be overstated from political, economic and social perspectives. This is indeed uncharted territory.

The repercussions of this vote for the future of the European Union could be profound. We are already seeing calls for a similar referendum in the Netherlands and France. Spain has presidential elections this weekend, while Germany, the Netherlands and France will elect their leaders in 2017. Will Angela Merkel, the glue that has held Europe together for the past decade, retain her position to lead the continent through its next challenge? Or will populism and nationalism splinter the frail union?

What’s next?

The U.K. has two years to negotiate the terms of its exit from the EU. During this period, we believe:

• Companies will reduce investment and hiring, as they await the new rules to be written.
• Consumers in Europe will likely curtail spending in the uncertain environment.

This will lead to a recession in Europe as a base case, while it is premature to predict whether this predicates a global recession.
In the coming hours and days, we will see various central banks comment on their commitment to do everything within their powers to promote stability. However, the market is already pessimistic about the diminishing effectiveness of each central bank’s incremental initiative. We are likely to see fiscal stimulus from governments to counteract the drops in corporate and consumer spending.

We expect that the relative stability of the US and Japan to be a benefit to returns versus Europe over the near term. From a sector perspective, financials face the greatest uncertainty and headwinds in the near term, as new regulations are negotiated and financial conditions tighten. Health care stocks, which have already underperformed significantly over the past six months, now appear very attractive and should be less affected by the prevailing political and economic uncertainty.

The conditions discussed above are reflected in the share price and currency moves we are seeing in the market today.

Bottom Line:

Indiscriminate selling results in mispriced equities, which creates investment opportunities for long-term investors. As in any market environment, there will be winners – companies that are positioned to exploit their competitive advantages in order to grow and gain share at the expense of weaker competitors. In the global equity portfolios, we are focused on identifying and investing in these companies.

By Chris Dyer, Director of Global Equity, Portfolio Manager, Eaton Vance.

The post Uncharted territory: What Brexit means for global equities appeared first on AdviserVoice.