Brexit: Southern European Periphery Will be Under Strain

It is way too early to make a fundamental assessment of what the UK “leave” vote means, says one firm.

LONDON—In light of the victory for the Leave constituency in the UK’s EU referendum, RBC Capital Markets ‘ global research department recently analyzed the potential impacts of the news on the breadth of its coverage universe. In the firm’s latest report, RBC global strategists and analysts’ examined the consequences of the Brexit vote for equities, fixed income, commodities and the broader economy and found that the initial period of uncertainty about the process for EU withdrawal will exert a cost on economic activity. “This downside news for likely levels of output means that there is a bias for looser monetary policy,” says the report. “The initial indication is that such a move won’t come today.” But RBC urges investors to think bigger. “The UK’s decision will undoubtedly have far reaching ramifications for the UK itself, but will also have far reaching implications for the euro area.” But even before the recent events, investors were reluctant to buy riskier fixed income assets in the euro area and started selling EUR assets in exchange for mainly USD (and GBP) assets, explains RBC Capital Markets. “This trend is now likely to accelerate even though we would expect mainly USD assets to benefit.” In short, RBC’s report says that the UK’s decision to leave the EU will have large ramifications for other EU member states and markets, including the euro area. “Within the euro area, it is particularly the Southern European periphery that will be under strain,” the report says. And according to a recent global equity research report from Canaccord Genuity, while Friday certainly qualified as a shock day for the global financial markets, with the worst one day performance since last August, it is way too early to make a fundamental assessment of what the UK “leave” vote means. But one thing is certain, the report says. “It is sure to keep volatility elevated and likely makes investors move toward the US financial markets and those equities that have less European risk.” Absent greater clarity on exactly how the UK will exit the EU once notice has been given, and with the unknown of global central bank response, the report offers investors a shopping list of 56 stocks that have minimal revenue exposure outside the US including Core Site Realty, Education Realty Trust and Zillow Group, to name a few. Click here for the full report. To read more about the financial implications, including key areas financial advisors should watch, visit GlobeSt.com’s sister publication’s story, ALM’s ThinkAdvisor.com.