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Alternatives industry sees more Brexit turbulence

Monday, March 20, 2017
Opalesque Industry Update - British Prime Minister Theresa May has said that Britain will trigger Article 50 of the European Union's Treaty on Lisbon by the end of the month, a move that will officially start the clock on the two year period during which the UK must negotiate the specific conditions for its withdrawal from the EU. Though May has revealed a 12 point plan summarizing her main objectives for Brexit –from the promise to maintain transparency throughout the process, to ensuring free trade with European markets and entering into new trade agreements with other countries– no specifics have yet emerged. With literally thousands of details to workout regarding Brexit, from both legal and financial points of view, ongoing uncertainty about Brexit has already translated to volatility for the British pound, which has yet to return to its pre-Brexit value. And many market prognosticators believe the pound will again plummet once the process officially begins.

With heightened volatility for the pound more than likely to create turbulence in both the FX markets and financial markets in general, Brexit will undoubtedly impact global markets in one way or another. Given this reality, the New York Hedge Fund Roundtable recently delved into Brexit and its potential ramifications. Why the Alternative Investment Community Should be Focused on Brexit was the topic of the Roundtable's February event, where H.E. Ambassador Christian Braun, Luxembourg Permanent Representative to the UN and former Permanent Representative of Luxembourg to the European Union, discussed some of the concerns related to Brexit and how they could potentially impact global markets.

"With the ins and outs of how Britain will actually unwind itself from the European Union still unknown, and mixed views on the result still being discussed, the only thing that is clear is that Brexit will be one of the most closely watched issues over the next two years, given its potential to impact markets around the world," said Adam Weinstein, president of the New York Hedge Fund Roundtable.

Roundtable members believe that there will be more market turbulence as details of how Britain will unwind for the EU emerge, but that it is still too early to determine whether Brexit will have a long-term impact on the global economy.

New York Hedge Fund Roundtable members had the opportunity to weigh in on this topic both at the Roundtable's February event as well as through an online electronic poll.

*Of the respondents to this survey, 31% were fund managers; 13% were allocators; 16% were risk management or trading; 33% were service providers; and 7% were other industry participants.

Following are some of the key findings:

  • Asked whether or not they believe we have seen the end of the Brexit fallout, 60% of respondents said that given Britain's own lack of clarity about how the country will unwind from the EU and how everything will play out, there will most certainly be more market turbulence as details begin to emerge; 31% believe it is still too early to determine whether or not Brexit will have a long-term impact on the global economy; and 9% think that the market's rapid rebound from the initial news proved that fears were blown out of proportion.

  • When asked if the current economic recovery is sustainable, 53% of respondents said that even though economic downturns tend to be cyclical and occur roughly every seven years, there is no indication that a downturn is on the horizon; 47% of respondents think that the boost the equity market has experienced since the president election has nothing to do with companies' fundamentals and that, combined with President Trump's unpredictability and America first attitude toward trade with other countries, will ultimately lead to a significant downturn of the U.S. economy.

  • 77% of respondents think that the Federal Reserve will raise rates at one of its next couple of meetings, now that the Brexit vote and the U.S. presidential election have passed; 23% think that given the recent slowdown in jobs growth and languishing wage growth it is likely the Fed will not raise rates again until the summer and that any increase will be minimal.

  • Asked if the 10-year Treasury yield's next 25 basis point move will be up or down, 75% of respondents said they believe it will be up and the remaining 25% think it will be down.

  • When asked where the best investment opportunities currently are for the alternative investment industry, 78% of respondents think that, following a 3 year lag in emerging markets, it is now time to begin increasing exposure to the sector; 22% of respondents think that, following Brexit and a loss of confidence in Britain, betting against the pound and British stocks is the best bet.

What do you think?

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