The poll was conducted just before the UK voted for Brexit, making it likely that uncertainty is now even higher. Macroeconomic insecurity is the dominant feeling in every European country except France, where most investors either have a positive or negative outlook.
Economic indicators haven’t really changed much compared to a year ago, when a large majority of fund buyers looked favourably at macroeconomic prospects. So what has troubled investors’ minds in the meantime?
Many of those polled still believe developed economies are recovering, with central banks firmly committed to stimulate economic growth. But on the geopolitical front, things have changed, as you know: a year ago, Brexit was an extremely remote, and very unlikely prospect. And Donald Trump had only just announced he was running for president.
Populism and Brexit – all risks to the downside
These two issues have produced significant tail risks for investors, as index provider MSCI pointed out in a recent research note. MSCI assessed the consequences for financial markets of ‘Brexit with contagion’, which would involve a further break-up of the EU as a consequence of the Brexit vote. Brexit is in turn likely to fuel the second tail risk identified by MSCI: the ‘rise of populism’ in Europe and the US. This would lead to pressures to increase social spending by governments and a decline in trade as a result of more protectionist policies. A combination of higher spending and contracting growth would send fiscal deficits to unsustainable levels.
According to MSCI’s analysis, a Brexit fall-out would be beneficial for low-risk assets, with government bonds outside the European periphery, and especially inflation-linked bonds, to benefit. European equity markets, however, would see double-digit losses, resulting in a 60-40 multi-asset portfolio to lose some 7.6% of its value.
A victory for populism would have even bigger repercussions: government debt yields would rise rather than fall as a consequence of higher fiscal spending. As a consequence, multi-asset portfolios are set to lose a whopping 11.1%.
In both scenarios, inflation-linked bonds are the big winner. After all, ‘stagflation’, rising inflation combined with contracting economic growth, is the best possible economic condition for inflation-linked bonds. Expert Investor found back in May that the theme is again on the table for many investors. And it’s only likely to attract more interest in the months to come.