Los inversores no tienen prisa por volver al mercado

Mark Tinker, responsable de AXA IM Framlington Equities Asia - Martes, 28 de Junio

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Asian investors had been sitting on the side lines waiting for the referendum vote, but following the shock outcome are in no rush to come back into markets just yet.
There are currently opportunities for informed traders and deep value investors, but for most investors there are still too many ‘unknowns’ to deal with; the prospect of further distressed selling, (key for value) the composition of a new UK government and its attitude to trade (key for growth) and the policy response, if any, from the EU (key for risk).
The next few weeks and months will deliver clarity on these issues, but until then investors will understandably remain very cautious. 

There is of course only one real topic of conversation here in Asia this week, the fallout from the European Union (EU) referendum vote in the UK last week. The sharp moves were a five sigma event in terms of the market volatility and described in some quarters as a black swan event. In reality however, the vote was not a market shock in the classic sense, it was, in Rumsfeld speak, “a known unknown”  but the reaction was arguably more extreme than it otherwise would have been, largely because, despite the opinion polls being very close, the markets had seemingly bet heavily on ‘remain’ in the last few days. As such, there was a rapid unwind and inevitable overshoot, particularly in the currency markets where much of the positioning was being carried out. The term ‘bet’ is appropriate here as it seems that a lot of what turned out to be unwarranted confidence in a ‘remain’ victory originated with the betting markets which had consistently shown a win for ‘remain’. However, as we cautioned a few weeks back, the betting markets do not always represent the so called smart money that somehow knows something, rather the weight of money being wagered. To exaggerate for effect, if every ‘remain’ voter had backed themselves with 10% more than every ‘leave’ voter, then the odds would have showed a win for ‘remain’ was being predicted. However, in this referendum, the actual votes were equally weighted.

While sterling fell heavily, it currently stands only a few percentage points below its pre-referendum low against the dollar, reflecting the fact that it had been steadily appreciating as foreign exchange traders bet on a ‘remain’ victory, particularly in the final hours. Sterling also fell sharply against the euro, but in context, at around 120 it is more or less in the middle of its long term range against the European currency. This rapid currency reversal has undoubtedly hit some trading books very hard and had knock on effects elsewhere – the yen went through 100 against the dollar with the associated hit to the Nikkei. Gold and the Swiss franc also rose and emerging markets got hit. In fact the Nikkei went down more in one day than it did in the global financial crisis. Importantly, this is market mechanics, the markets are repositioning themselves, they are not delivering any verdict or predictions on the economics.

This flight to safety has undoubtedly unsettled investors, most of whom were sitting on the side lines waiting for the referendum result, as a whole host of new uncertainties now come into view. Markets are said to hate uncertainty, in fact what they hate is volatility, particularly those parts of the market that employ large amounts of leverage to exploit relatively small spread or arbitrage opportunities. Such strategies involve taking a known and measureable risk and need other variables to be stable. Under conditions of general uncertainty they become vulnerable and as such these markets will tend to deleverage at such times and the ripple effects are extremely difficult to predict. This means that when events like this occur two sorts of opportunities arise; those for smart and informed traders who can try and exploit the distressed selling or forced buying of traders and investors who are being forced out of positions and those for deep value investorswho can pick up assets (primarily equity) on the basis that the market prices more than offset the potential risks. Unfortunately the majority of investors do not have the luxury of being deep value players and the risk of being ‘right but too early’ is too high for most people. The best we can do is set out some form of road map to help digest the news flow as it comes through and our known unknowns become known knowns and unmeasurable uncertainty morphs into measureable risk. 

Firstly, on the UK and the exit process itself. We know that the EU want the UK to trigger Article 50 and start the two year clock ticking straight away. We also know that UK Prime Minister David Cameron has said this will not happen until there is a new leader of the Conservative Party, something we now know will happen no later than Friday 2nd September. In terms of unknowns, nominations will close at noon UK time on Thursday this week, which will give us some clearer insight as to the new team. The process involves Conservative Members of Parliament selecting two names to be put to the party grassroots members for a vote. Unfortunately this is probably the only uncertainty with a clear timetable. The second main concern for investors is the prospect of financial distress leading to second round effects. This is standard practise after a financial shock. We know that there has been a depth charge and we are waiting to see if any bodies float to the surface. As we wait, we can look for any signs of distress, either forced buying or selling – the curious behaviour of the VIX (volatility index) on Monday night may be one such indication, or it may not. This is a key reason why investors other than deep value buyers are likely to remain on the side lines for a while yet. This may take a few weeks, but in the absence of any bodies, I would expect some value buying to appear. Perhaps local bias makes me consider Asia in the first instance as, without any evidence of distressed selling or redemptions, the valuations are extremely attractive and there is less prospect of any potential earnings shocks. Indeed, one potential positive aspect of the UK leaving is that the world’s fifth largest economy (and fifth largest importer) is exiting from a customs union. This will provide opportunities for many emerging markets that previously had to overcome the EU tariff barrier. Clearly this will depend on the nature of the new UK government, but it should become quite clear, quite quickly whether they will be isolationist or pro trade. I strongly suspect the latter, but investors will naturally want to wait for more evidence. An announcement on talks for a bilateral trade deal with the US for example, or with China would undoubtedly encourage growth investors in related markets. South Korea has already asked for a bi-lateral deal and undoubtedly many others are lining up. For Europe however, I suspect that international investors will remain cautious ahead of greater clarity on policy response, which may come soon, or may not. Lessons from the financial crisis, or indeed the Shanghai Composite last year, are that policy response can often exaggerate an existing problem, or introduce a new one. The Bear Stearns collapse evolved into the Lehman crisis that became a full blown economic crisis when Lehman was allowed to go bust. As discussed on a number of occasions, nobody foresaw the impact that Lehman would have on the money market funds and by extension a collapse in global working capital. In China, the flight from a speculative bubble based on MSCI inclusion turned into a stampede when policy makers tightened margin requirements just as speculators tried to exit. How the EU policy makers respond to the referendum is thus extremely important to investors. Will they be very tough, or more pragmatic? We have to wait.

Meanwhile, the standard market response of demanding lower interest rates looks unlikely to achieve very much given rates are at or close to zero already. I think it is fair to conclude (as the market has) that the next US rate rise is on hold again, which  helps emerging markets, although the stronger dollar is probably a bigger problem for the over-indebted ones. The European Central Bank is likely to continue with its asset purchases, which as we know is good for large corporates and the ongoing low interest rate environment in Europe is likely to be good for many of the property companies. This is certainly one trade that the market already seems to be putting on. Elsewhere, the prospect of good cash flow, strong dividends and non-European earnings is attracting attention from value investors at the stock rather than index level. For international investors however, the decision on stocks usually has a currency component first and they are likely to wait for greater signs of stability in foreign exchange before investing.

To conclude, in Rumsfeld speak, this was not a traditional shock in the sense that it was an unknown unknown. We knew this event was coming, we had a known unknown, the referendum, which went against expectations and has triggered a series of new known unknowns and we need to resolve these in turn in order to progress with an investment strategy. The first unknown, who will be the UK Prime Minister, will become clearer this week as nominations are made and become ultimately known by September 2nd. The team in place will then help us assess the second unknown, whether the UK will become more isolationist or more free trade in nature. This is key to assessing economic growth prospects. If it is the latter, then markets will become more confident about the prospects for growth and look for winners, especially in emerging markets as the world’s fifth largest economy comes out from behind a tariff barrier. Before then however, we are likely to have to negotiate another unknown, whether some financial institutions have been seriously impacted by the market gyrations in recent days. As we saw with long term capital management, or Lehman brothers, to name but two, the aftershock of a financial event (the Russian default, the Bear Stearns collapse) can often be more severe than the original. This will keep investors wary and on the side lines, probably until the end of the summer, not least as they contemplate another known, unknown, what will the policy response be? How unpleasant/pleasant will the divorce be and what are the chances of a domino effect? At the moment there is only conjecture and speculation and it is probably fair to say that share prices reflect something closer to the worst case scenario. However, unlike the referendum, there is no clear timing, just a steady accumulation of evidence in one direction or the other. Oh and then we run into the US election.

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