Brexit concerns have hit U.S. shores, with investors, investment consultants and global money managers worried about the potential implications of a U.K. exit from the European Union.
U.K. voters go to the polls June 23 to decide the outcome of the so-called Brexit vote.
Sources said the issue of a Brexit is starting to come up in conversation with U.S. investors, joining items on their agendas including the upcoming U.S. presidential and congressional elections. Some investors are questioning the effect on their investments in passing; others are becoming cautious on the sterling, the euro, and U.K. and European assets. And some pension funds, global money managers and U.S.-based investment consultants are themselves concerned about the potential impact of a “yes” vote.
The Brexit vote has introduced a “huge level of uncertainty. It has been part of all our asset allocation meetings discussions, because we think the U.S. market is pretty toppy, and we think Europe is interesting,” said Christopher J. Ailman, chief investment officer at the $186.8 billion California State Teachers' Retirement System, West Sacramento. “But (the Brexit vote) puts a huge question into Europe and especially the currencies.” And when CalSTRS executives have been buying Europe, “we are not buying U.K., and normally we would ... we are buying more continental Europe,” he said.
Phillip R. Nelson, director of asset allocation at NEPC LLC, in Boston said: “We are seeing a small level of cautiousness starting to creep in. I wouldn't say it is at the foremost of investors' minds today. The Brexit piece, I think, is secondary to investor concerns here about corporate earnings in the U.S., and what's going on in China.”
“From a big picture (perspective) the U.S. election really takes the headlines, and Brexit is something exotic that goes on in another country,” said David Morton, a partner and chief market strategist at Rocaton Investment Advisors LLC in Norwalk, Conn. “When I go to a client, they might start off conversationally asking "Will the U.K. leave the EU?' but it is not front and center of their minds.”
But Rocaton consultants are worried. “From a research group at Rocaton (perspective), we are quite concerned about what happens to markets if there is a Brexit,” said Mr. Morton. He referenced recent polling figures showing the vote is expected to be close. “There is a non-trivial risk that Brexit might happen, and I don't think markets are priced for that at all. Right now we are in a period of relative calm in the U.S., where everything looks rosy — and yet we have this fairly material risk,” which could throw European and then global markets into a tailspin, he said.
As a result, the firm is “not wholeheartedly seeking risk today,” although it was a few months ago. “We might pare back some risks, delay some investments in asset classes that might be affected by a Brexit” such as subordinated debt of European banks, Mr. Morton said. While that asset class is priced “interestingly,” it would get cheaper in the event of a Brexit. He added that, regarding global equity, the firm “would pause on going global vs. staying domestic.”