Brexit. This
suspense is terrible.
This suspense is terrible. I hope it will last until 23rd June. UK referendum to exit Euro zone is a big
deal. Yes to stay and accept the
immigrant issues, get one off refund from Eurozone bailout, enhance London
financial center status and other terms.
No means exit Euro zone and many things could change from import export
tax to individual working visa. The GBP
dropped 2% on 22nd February on the back of London Mayor Boris Johnson joined
Brexit campaign. This shows the
financial market may not welcome the possible exit which is generally viewed as
bad for business.
One of the smartest UK decisions in history is to
retain British Sterling and did not use Euro.
UK could maintain its own independent monetary policy such as interest
rate, issuance of debts and budget.
Imagine if UK has to follow Euro zone to adopt negative interest rate. Look at the headache Switzerland had in
trying to defend EUR CHF. Something is
not working in this relationship and both UK and Euro zone have put in effort
to mend it. Prime Minister David Cameron
has put in great effort to negotiate the terms for this referendum but the
terms seem to be just pain killers. It may ease the pain but does not change
the relationship. If UK citizens vote
yes to stay, the big picture remains unchanged.
If UK citizens vote no, UK can decide its immigration policy on Euro
zone citizens.
Immigration policy is probably as important as
monetary policy. It has a very long term
and deep impact to the culture. While
the facebook, the Instagram and YouTube have flattened the world as every
global citizen is exposed to similar information, actual people movement can
have big impact to employment, demography, religious, talent structure of a
society. The hedge fund managers and
traders may sell off GBP as an immediate reaction to the uncertainty of Brexit. But these movements in financial market are
short term. Voters need to consider the
impact to the future generations.
Global stock market continues to be volatile and
fragile. Some oil exporting countries
are liquidating asset to make up of the shortfall in cashflow due to low oil
price. Mutual funds and hedged funds are
probably still getting redemption from oil related high networth individuals
and family offices. As stock prices
drop, there are margin calls on clients who are leveraged and these margin
calls lead to more liquidation. The low
interest rate in USD, EUR and JPY encouraged investors to leverage in the past
years. So the market is deleveraging portfolio
that took years to build. The selling is
so fierce that it distorts market valuation to 2008 level. If this is 2008 and history repeats, then it
is a year to bargain hunt. Some
investors may consider buying index funds.
However, the banking sectors, the oil and gas companies, commodities
sector and properties in some markets deserve further consideration. European banks are once again under the spot
light and there have been a lot of news about Deutsche Bank. Deutsche Bank is trading at EUR 14.92 as of 24
February, 2016. It has fallen 33.3%
since 31st Dec 2014. Credit Suisse, BNP,
HSBC, Barclays have all fallen 39%, 21%, 23% and 26% in their share price since
31st December, 2015 respectively. No
bargain hunting here.
BP and Royal Dutch Shell have gone down 3% and up
4.6% in share price since end of last year.
In the same period, oil price is down 14%. BHP Billiton, Rio Tinto and ArcelorMittal
share prices are 10%, 8% and 19% down year to date respectively. Many of these companies have debt to be
re-financed and even if some of them managed to find lenders, the cost of fund
is likely to increase. There is an over
capacity issues in the resources sector and consolidation will happen. It is probably too early to bargain hunt but
there should soon be some emerging opportunities in oil and gas stocks. They just got hammered too badly.
Property prices in Asian cities like Hong Kong and
Singapore are softening. This is because
of the government policies in Hong Kong and Singapore have been armed to
deflate the property bubble. On the
other hand, residential property prices in China tier one cities like Beijing,
Shanghai, Shenzhen are rising 30% to 60% in the past 12 months according to
local property agents. Some high end
luxury properties in these Chinese cities are selling at over GBP 1,000 per
square foot. Chinese government has
narrowed the gate for money outflow and the local stock market has been more
than disappointing. This combination drives
excess liquidity to tier one cities property.
London properties will probably continue to attract Asian buyers.
