Brexit a boon for value investors? Not so fast

Vincent Lépine is not buying in Europe today.

While some market analysts said Brexit would create opportunities to buy European equities, Lépine, who’s vice-president of Global Economic Strategy (Asset Allocation and Currency Management) at CIBC Asset Management, is more cautious.

“If you look at it from a valuation angle, you could probably argue this adds attractiveness. But a valuation has to put in light of what’s happening in terms of the cyclical backdrop,” says Lépine. “This Brexit outcome comes at a bad time. It adds political uncertainty when you’re getting increased evidence that the world economy is slowing; specifically in Europe. I’d be careful with the whole valuation argument at this stage.”

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Having gone risk-off prior to the vote, he’s comfortable with his current asset allocation.

“[Our] portfolios are positioned where you keep an overweight in equities, but it’s a small overweight,” he says. “In terms of bonds, you keep positions that are close to being neutral, with an overweight in corporate bonds.”

When it comes to safe havens, “the one asset class that benefits from all the uncertainty would be gold. And in terms of valuation, gold prices are attractive. So I’d say gold would be the ultimate winner in all of this.”

Read: Brexit means discounts for U.K. companies

Going forward, Brexit “translates into a more negative outlook for the whole European area. In terms of strategies, you have to be shying away from positions that would be taken in European equities.”

And, actually exiting will take years to unfold. “It’s very hard to figure out what the ultimate outcome is going to be.”

Monetary policy reactions

This morning, the Bank of England said it’s ready “to provide more than £250 billion of additional funds through its normal facilities,” as well as “substantial liquidity in foreign currency, if required.”

Says Lépine, “They want to make sure there won’t be increased tensions in the banking and financial system. The next step depends on how deep the correction is to the pound. They’ll have to see how the currency behaves and if it doesn’t stabilize, they’ll probably have to intervene.”

Read: What to expect when you’re Brexpecting

With both North America’s central banks making rate announcements in July, Lépine predicts caution will rule the day.

“For the U.S., you have a central bank that was planning on hiking interest rates. Now with these developments, that adds another source of uncertainty regarding the world economy. That will probably force them to stay on the sidelines longer than they initially planned.”

In Canada, he says, “one thing is clear: if we’re right and the world economy is slowing, that’s not a positive for energy prices, and Canada depends on what happens to oil.” If crude plummets again, “that’s going to be a hit for Canada, which is already weak in terms of the economy. So the Bank of Canada is probably going to have to ease policy eventually, although they don’t have a lot of leeway left because rates are already really low.”

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.