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Deutsche AM cuts EU equities to neutral

If the UK votes to leave the European Union, the strongest impact would be on equities, said Sean Taylor, CIO for Asia Pacific.

“We see a 35% chance that Britain will vote out of the EU,” Taylor said at a media briefing in Hong Kong.

“The market seems to be pricing in an outlflow already given where sterling is, and the polls at the moment seem to be 50:50. [The outcome] is very hard to call.

If a Brexit occurs, he believes the equity markets “will have tremendous volatility”. 

A Brexit would hurt the UK economy and UK-related assets in the short-term and would trigger a risk-off mode, weighing on most European risk assets, he said. 

“The market hates uncertainty and it is a real uncertainty. A Brexit would hurt both EU and UK equities as the uncertainty triggers volatility and higher risk premiums,” he said.

FTSE 250 Index firms would be impacted the hardest, given their higher exposure to the domestic economy.

“Our reaction to this is that we have taken overweight on European equities down to neutral because we think there is too much risk from Brexit,” he said.

Other equity markets

At the start of 2016, the firm had a preference for Japanese and European equities, but it is neutral on every area of global equities, he said.

The reason why the firm is turning negative toward Japanese equities is mainly due to a stronger yen, which could cause the economy to deteriorate by hitting, for example, the tourism sector and Japanese exporters. 

“Our strategy on equities is to pick the right stock from the right sector at the right time, [which is] highly opportunistic and from bottom up.”

Taylor believes that any impact from Brexit on the rest of emerging markets would be modest, as they are less correlated to Europe than to China and India. 

The firm expects improved sentiment for emerging market equities, largely because the RMB appears to be stablising.

“In the last six weeks, we are seeing a more stabilised RMB, while the manufacturing economy has not deteriorated as people thought. The property market continues to improve and the service sector is growing in real terms. These factors are bringing positive sentiment to the market.”

There are also signs of stabilsation in emerging markets’ GDP, and improved corporate earnings, he said.

“But what is stopping us from overweighting emerging markets? The biggest reason is an anticipated stronger US dollar, thereby putting pressure on emerging markets,” he said.

Part of the Mark Allen Group.