Investors trying to assess the impact on their fixed-income allocations, should Britain vote to leave the European Union, need to take care not to confuse the “dog” with the “tail”, global asset manager AlllianceBernstein (AB) said today.
“It’s important for investors in Australia and elsewhere to get the right perspective on the referendum so that they can make appropriate decisions for their portfolios,” said Ashish Shah, the firm’s New York-based Head—Fixed Income.
“Is the referendum the dog or the tail, the cause or the symptom, of the issues that they should be worried about? From a global perspective, we think it’s the tail—the symptom of much bigger concerns.”
According to Shah, the referendum is an example of how the continuing challenges faced by the global economy can feed into pressure for political and institutional change.
“It’s a symptom of how global growth remains challenged in the face of significant demographic changes and the accumulation of debt, and it’s a reminder of the significant limitations of monetary policy in dealing with such issues.
“Quantitative easing, or the purchase of government bonds by central banks, has not helped to ease the problem as was intended—by adding liquidity to the financial system to encourage companies to borrow and invest.
“Instead, it’s led to asset inflation, enriching investors instead of creating jobs and stimulating the productive economy. This in turn has created more inequality and is helping to drive the move for political change globally.”
These were the issues on which investors should focus now and beyond the June 23 referendum, irrespective of how Britain voted, said Shah.
“It’s true that Brexit, if it happened, would pose a risk to UK economic growth. We expect that the real- estate market would cool off, and falling house prices would adversely affect consumers who have been forced to take on more debt to buy somewhere to live.
“This would make the UK—which is reliant on foreign capital to finance debt—more vulnerable.”
But the global risks would remain whichever way Britain voted.
“If the global asset bubble created by central-bank bond purchases bursts, that represents a threat to future growth,” said Shah. “Add to this the fact that China is challenged by debt accumulation and the US has started to raise interest rates, and it’s clear that Brexit is just one of a number of risks.”
He noted that Australian investors were just as exposed to these risks as investors elsewhere. “As in the UK, we see the potential for a correction in the Australian real-estate market, and of course Australia has particular exposure to China’s demand for commodities.
“This explains why we’ve been favouring Australian government bonds and UK gilts in our portfolios ahead of Australian and British corporate bonds.”
Shah added that the highly uncertain outlook was a good reminder of why investors should hold bonds in their portfolios. “They’re there to balance things out—particularly in times of risk.”
