The UK referendum result has dealt a blow to capital markets, but not a devastating one.
In the capital outlook commentary, which is currently posted as a video on the RBC Global Asset Management website
, Chief Investment Officer Dan Chornous explains that while the vote understandably set off some immediate panic, it is an expected response to any crisis.
“You always expect a disaster the next morning when they actually get the markets open. In fact, what happens, markets do a trade-down. Three-to-4% would be the median decline. But usually by the third day, the worst of the decline is absorbed, and it spends the next week or so getting all the way back to where it started. Beyond that, you get a sorting out,” Chornous says in the video.
Looking at the economic implications, Chornous foresees a slight decrease in growth and slightly higher inflation in the UK and the US. He also predicts that the probability of key rate hikes would be closer to nil, with the slight possibility of rate cuts as well as increased appetite for fiscal stimulus. “What I would tend to nudge down one's economic expectations from low levels to even lower levels out over the horizon, but no recession,” he adds.
Due to negative interest rates that are being offered in different markets around the world, fixed-income securities are expected to deliver low yields for the foreseeable future. Stocks, on the other hand, are seen as currently undervalued, and profit growth from these tradeable assets has been limited by falling energy prices and a strengthening U.S. dollar.
“While we've moved down our expected rate of growth in the economy, it's quite modest. There will be winners and losers from this, but overall slightly slower growth, slightly lower inflation. That doesn't seem to be a reason to change an intermediate or a longer term view on either bonds or stocks. We've left our overweight in equities in place and our underweight in fixed income.”
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