London-based Murray, who leads a team that helps the investment committee make allocation decisions, visited Singapore earlier this month to tell Asian clients he does not believe Brexit will spark a global economic recession, and any negative consequences from the vote in the short-term will be largely contained in the UK.
“Although Hong Kong and Singapore are more exposed to the UK [than the rest of Asia], and financial and trade flows have some correlation with the UK and the EU, Asia is something of a safehaven,” Murray told FSA.
Though China’s slowing growth and econmic transition is closely watched by his team, emerging markets, led by China, have favourable conditions.
“Emerging market [equities] look interesting because of continuing supportive monetary policy, with US rates lower for longer and with support from [lower] valuations.”
Elsewhere in Asia, Japan’s structural challenges remain, but market valuations are historically cheap and there is potential for more monetary stimulus, he said. Additionally, in 2020 the summer Olympics are coming to Tokyo.
“Few people mention that the Olympics are coming through,” Murray said. “It will have a big impact on certain employment sectors such as tourism and construction. The Bank of Japan estimates are that it will add 0.2-0.3% to the GDP over the next three years. It doesn’t sound like much but in the context of Japan, it is significant.
“In Japan, we are more concerned about upside than downside surprise,” Murray said.
Slightly good
Murray had some mildly positive things to say about the global market outlook for 2016.
The US, for example, has been largely unaffected by Brexit. Despite the risk of declining corporate profit growth, Murray doesn’t believe US GDP growth will fall.
“It would be extremely unusual for a recession to occur in the US without monetary policy tightening. Usually recession follows not a small amount of tightening but a year or two of rate increases.”
In other developed markets, previously-announced action by the European Central Bank and the Bank of Japan together will add about $2trn to global liquidity this year. “That’s quite meaningful and it has to find a home.”
However, market volatility should be higher in the second half and it will hit sectors outside energy.
“For the next six months, investors will have to be much more nimble in terms of investment decisions. More short-term and thinking less about overall trends but more about how to respond to risks.
“This year, risk is from political events, which, as Brexit showed, are impossible to predict.
“`Risk-off’ is not the right description. It is more about being more selective on where we have risk on and on being attentive and sensitive to the market volatility.”
The useless 52 words
Murray said market sentiment may improve once Article 50, which starts the process of exiting the EU, is invoked.
“Article 50 is the sole piece of European legislation intended to provide guidance if the UK chooses to leave the EU. You would think a lot of thought has gone into what would happen in an important event such as a country exiting. In its entirety, Article 50 is 261 words, of which 52 words are important. It’s useless.
“Invoking Article 50 would bring some clarity, but we don’t know what’s going to follow. There is no precedent against which to judge the situation.
“The simple truth is nobody knows the long-term impact of Brexit. We expect a short-term drag on the UK economy. GDP growth will slow and the number of unemployed will increase by half a million. It is not a collapse or deep recession, but there will be lower growth.”
