With markets completely wrong-footed by the decision of UK voters on 23 June to leave the European Union (EU), the immediate market reaction was extreme. In a classic risk-off move, equities around the world fell, and bond markets – particularly core government bond markets – went up, with yields for 10-year US Treasuries, German Bunds and UK Gilts experiencing historic lows.
While liquidity conditions may be favourable, global equities are expected to face cyclical and structural challenges. The uncertainty over growth and structural problems may also keep markets somewhat volatile. In terms of regional allocations, our preference continues to be for developed markets over
|MSCI Asia Pac ex
|Hong Kong Hang Seng
|Hang Seng China
Source: Thomson Reuters Datastream, total returns in local currency unless otherwise stated. Data as at 30 June 2016. YTD refers to year-to-date.
- In the US, the S&P 500 index fell by 5.3% in the two trading days after the vote as global equity markets felt the impact of the surprise EU Referendum outcome. However, signs that the US Federal Reserve (Fed) might hold off on further tightening monetary conditions in 2016 helped US stock markets to bounce back.
- We continue to be positive on the relative strength of the US economy. Although the US dollar has reversed course since the start of the year as expectations for tightening were scaled back, the US is one of the few countries that has the ability to tighten without undermining growth in its economy.
Europe (including UK)
- In the UK, the Referendum result triggered a shock in sterling, sharp falls in share prices. Across Europe, equities declined in June as investors grappled with political and economic uncertainties following UK voter’s decision to leave the EU.
- There are concerns that the positive impact of monetary policy is diminishing. Moreover, structural headwinds surrounding Brexit, as well as the high levels of excess leverage and negative geopolitical developments, are likely to weigh on growth in the region.
Asia Pacific (ex Hong Kong ex China ex Japan)
- Asian equity markets, on the other hand, ended the month generally higher, helped by the Fed’s dovish remarks which reduced expectations that US interest rates will rise in the near term.
- Although accommodative policies are starting to feed through to supporting growth, and fiscal steps are being adopted, the economies in Asia will continue to face challenges with leverage and capacity, leading us to remain cautious toward Asia. Further policy efforts are expected if economic conditions require action.
Hong Kong and China (A-shares and H-shares)
- In China, the equity market rose marginally on some evidence of economic stabilisation and improving sentiment.
- Although accommodative policy measures may benefit certain sectors, there are a number of external and domestic challenges that will continue to weigh on growth, such as leverage, capacity and slow external demand. In Hong Kong, the weaknesses in consumer spending and housing demand are unlikely to turn around on a sustainable basis any time soon as mainland China demand weakens.
- In Japan, investors had remained risk averse ahead of the UK referendum on EU membership, with the unexpected shock outcome leading to another surge in Japan’s yen and a drop in the country’s equity market.
- The negative interest rates adopted by the central bank may have limited the impact on turning growth and sentiment around at a time various economic indicators are suggesting further economic weakness. Further fiscal measures and the ongoing improvement in corporate governance are some of the positive fundamental developments in Japan.
- Bond markets provided strong returns through June with data from Merrill Lynch showing the Gilt market delivered its highest monthly return since 1986.
- Global government bonds are expected to continue to benefit from limited inflation risk. Moreover, periods of high volatility could lead to a ‘flight to safety’ in bonds.
- Global emerging equity markets also enjoyed a positive month, with the impact from the EU Referendum outcome having less of an impact on the asset class than anticipated.
- Sentiment towards emerging equity markets was boosted by expectations of easier overall global monetary policy for longer, with the futures market now pricing out any likely US interest rate hike until 2017.
All data are sourced from Invesco dated 19 July 2016 unless otherwise stated. This document contains general information only. It is not an invitation to subscribe for shares in a fund nor is it to be construed as an offer to buy or sell any financial instruments. Nor does this constitute a recommendation of the suitability of any investment strategy for a particular investor. While great care has been taken to ensure that the information contained herein is accurate, no responsibility can be accepted for any errors, mistakes or omissions or for any action taken in reliance thereon. Opinions and forecasts are subject to change without notice. Investment involves risks. Past performance is not indicative of future performance. This material is issued: in Hong Kong by Invesco Hong Kong Limited ( 景順投資管理有限公司); in Singapore for Institutional Investors/Accredited Investors by Invesco Asset Management Singapore Ltd.