Post Brexit: EM assets relatively more attractive – SocGen

Research Team at Societe Generale, suggests that as the United Kingdom searches for a path forward in the aftermath of the referendum on EU membership, the dimensions most relevant for emerging markets are the impact on risk sentiment, downward pressures on domestic growth, and repricing of developed markets’ monetary policy.

Key Quotes

“The prospective years of uncertainty ahead for the UK and the rest of Europe are likely to weigh heavily on investor and business confidence. The Brexit outcome also raises numerous challenging questions regarding regional security and political ramifications. With that said, EM assets now appear relatively more attractive in light of Europe’s unravelling.

Within EM, CEEMEA countries have the strongest trade ties with the UK and with the EU, and are likely to see GDP growth slow modestly. For CEE countries, ramifications from Brexit extend far beyond the strong regional trade linkages and export reliance. The CEE region remains in focus additionally due to the heavy flow of remittances from the UK, dependence on EU funds, and political implications.

With respect to valuations, the downward global repricing of interest rates amid looser monetary policy conditions extends a low-for-longer rates environment that boosts the appeal of EM assets. Developed markets’ policy accommodation will likely also spill over into easier monetary policy conditions in EM, in light of local economies’ greater need to cushion against growth pressures.

As interest rates in core and safe-haven markets march lower in a slower-growth environment, the high positive yield differentials offered by EM appear increasingly attractive in the absence of compelling alternatives. Additionally, we note that technical arguments further strengthen the case for EM assets.”