Brexit & the Markets: US & European Equities
US Equities have continued to perform well over the quarter. The steady dollar has provided some good protection against the volatile pound and have seen a strong outperformance in the aftermath of the Brexit vote.
However, there remains a concern that valuations have been stretched and enhanced with share buybacks. Furthermore, the US economy is clearly entering the later part of the cycle and there may be a greater chance of an economic slowdown. It is less likely that there will be a full blown recession without an external catalyst.
Given the strong currency gains and the higher stock valuations, now may be a good opportunity to trim some positions and reinvest into other equities with a more attractive risk return profile. There is also a downside risk from the upcoming US election.
European equities have suffered from the Brexit vote and the Euro has not held up as well as the dollar, limiting the currency protection. There are clearly concerns that there could be Brexit contagion to other EU countries, however, the likelihood of this is probably lower than fearful markets are pricing. European leaders are scrambling to ensure the union is maintained, however, there are several elections coming in the medium term which may cause additional market/political disruption.
However, the selloff in European equities has made valuations more attractive and the slightly weaker trade weighted Euro will benefit EU economies and companies. As with the UK the majority of large European companies earn significantly in foreign currency, so any Euro weakness will act as a support for growth.