Income & Fixed Interest
June 2016
 A red, white and blue domino
Vimal Gor
We will be writing a much longer piece in this
month’s Newsletter but given the volatility we
thought it was worth sending this quick update
on our thoughts and portfolio positioning.
The Brexit vote showed the fault lines that
have opened up in Britain across age,
education, location and class and these
divisions are present and growing across the
rest of the western world. To view this as a
protest vote would be to underestimate the
feeling of abandonment that many sectors of
society feel right now and are showing up in
many countries as support for far left and far
right parties. As inequality rises and the
benefits of central bank policies accrue to a
small wealthy subset the rise of the
disenfranchised was only a matter of time.
Like the single domino falling, Brexit will have
ramifications in a range of areas, emphasised
by the sheer unexpectedness of the result. As
at Asian open on Friday, betting odds moved
to 90% expecting Bremain. Friday’s markets
also showed the reaction: globally bonds
rallied 20-25bp, equity markets sold off 3-10%
and the US Dollar recovered by 3%. Sterling
was off 8% to below 1.37 against the US
Dollar, after printing a low of 1.32.
The economic effect on the UK will be
immediate. Uncertainty and higher credit costs
will slow investment and hiring plans. There is
a very high likelihood the UK will fall into
recession this year as a result of this. But the
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key issue is how the Europeans handle this
outcome. If Europe comes out on the offensive
to make an example of Britain it will further
lose the confidence of its people and the
autocratic manner in which it acts may well
backfire. As more Eurosceptic nations are
emboldened to call for their own referendums
the pendulum way well swing towards less
rather than more integration.
The market effects are broader than just on the
UK. I think it's clear that this outcome unlocks
further central bank easing, firstly in the UK,
Europe and Japan, then the US. Central
banks have been itching for a reason to play
with more negative rates and helicopter money
and this gives it to them. The key question is
does this flood of liquidity support asset
markets or not, i.e., are the central banks
impotent or do they still have credibility? To
summarise, I think it will drive bond yields
much lower but this has limited effect on risk
assets. To buy this dip in risk assets you have
to believe that the worst is behind us, both
economically and politically. I think the risks
are rising on both fronts. As you know my
view is that the US is in recession right now,
and that the world is slowing. People will
blame Brexit for the coming weakness but that
is mistaken as it was already there, but Brexit
certainly makes it worse.
On Friday morning we believed that the market
had largely priced in ‘Remain’ and as such the
risk reward was very attractive. The portfolios
1
were therefore long duration (in Europe and
Australia) and short Euro and AUD against the
USD. These trades have worked well and most
of the portfolios have generated strong
performance so far this month. We are sure
the markets will remain extremely volatile and
the portfolios are very well placed to benefit
from this. Key trades for me are long front end
in Europe and Australia, and long 30-year
bonds in the US, as a safe haven yield grab
story. Long USD and JPY in currencies,
against everything else, but certainly the Euro.
Vimal Gor
Head of Income & Fixed Interest
BT Investment Management
About BTIM’s Income & Fixed Interest Boutique
BT Investment Management’s Income & Fixed Interest team of ten dedicated
professionals, led by Vimal Gor, manage the #1 performing Australian
composite bond fund of 2014 and 2011.
For the latest Market Insights from Vimal Gor and his team visit
btim.com.au/education-and-resources/
This information has been prepared by BT Investment Management (Fund Services) Limited (BTIM)
ABN 13 161 249 332, AFSL No 431426.
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