Skip to the content

Four investments to consider over gold in the post-Brexit world

27 September 2016

Legal & General Investment Management’s Justin Onuekwusi argues that investors can look beyond typical safe haven assets like gold in the current market environment.

By Gary Jackson,

Editor, FE Trustnet

Investors can find opportunities other than safe havens such as gold in the current market backdrop, according to Legal & General Investment Management’s Justin Onuekwusi, who says areas like oil, emerging markets and UK stocks could be attractive to those with a multi-asset approach.

While the UK’s vote to leave the European Union on 23 June prompted a spike in volatility and an investor flight to areas of perceived safety such as gold, Onuekwusi – who manages LGIM’s multi-index fund range – says this has created a number of compelling opportunities in a range of areas of the market.

“As an asset allocation team that takes more of a medium-term investment view, we typically tend to look through short-term macroeconomic and political noise. However, when the short-term risks are significant enough, we act,” he said.

“Following the UK’s vote to leave the European Union, other global events have continued to capture our attention. Given the various political and economic uncertainties unfolding in Europe, combined with concerns about the Federal Reserve increasing rates more quickly than expected and the possibility of a Chinese hard landing, we have reduced our overall risk outlook from neutral to negative.”

Performance of gold since Brexit referendum

 

Source: FE Analytics

“Today, the opportunities for multi-asset investors extend much further than traditional safe-haven assets such as gold. As the dust settles following the EU referendum, talk of ‘Brexit means Brexit’ will continue. But the multi-asset universe is laden with opportunities and is constantly expanding. It is the role of the investor to adapt and evolve within it. Volatility creates opportunity, and as Peter Lynch once said: ‘The person that turns over the most rocks wins the game.’ This is particularly true for multi-asset investing.”

In the following article, we take a look at four areas of the market that Onuekwusi thinks look more attractive than the yellow metal at the moment.

 

1. Interest rate sensitive sectors

The multi-asset manager says that areas such as emerging market debt and property could be good ones to consider as monetary policy around the world continues to be loose, with the likes of the Bank of England, the European Central Bank and the Bank of Japan taking interest rates to record lows.


“As many anticipated, the Bank of England (BoE) acted aggressively to address post-referendum market volatility and reduced interest rates in August,” Onuekwusi said.

“This benefitted interest rate-sensitive sectors such as hard currency emerging market debt [EM debt priced in US dollars] and global real estate securities. A further tailwind comes in the form of ‘lower for longer’ rates, which are likely to exacerbate the demand for yield and reduce the expected cost of debt for these asset classes.”

 

2. ‘Black gold’

Following some very steep falls in the recent years, the price of oil has rebounded of late and is up some 40 per cent over the course of 2016. Onuekwusi says the commodity and the equites linked to it could rally further from here.

Performance of oil and energy stocks over 3yrs

 

Source: FE Analytics

“All that shines is not necessarily gold,” he said. “The price of oil plunged in the immediate aftermath of Brexit, but it has since recovered from its lows. Indeed, we have been seeing upside risks in the oil market, which could start to move back into balance after two years of oversupply.”

 “Rather than a cause for concern, recent falls may prove an opportunity for multi-asset investors to begin increasing their exposure to the energy sector once more. Given the relative weakness of energy-related equities in the last two years, stabilisation in the oil price could lead to significant gains in the sector.”

 

3. GEMs regaining their sparkle

 Global emerging markets are another part of the investment universe that have suffered in recent years but have enjoyed a strong run in 2016 thanks to factors such as more attractive valuations and stabilising commodity prices.

Onuekwusi said: “Emerging market equities have always been one of the riskier asset classes in the multi-asset investment universe and China’s growing debt remains a cause for concern. But as oil-related sectors gain appeal, so too do the prospects for many EMs linked to oil and mining companies.”


“Of course, prospects for global emerging markets are also tied to changes in Fed policy. But while a Fed rate hike and Chinese hard landing are clear reasons to be cautious and even underweight EMs, investors may look to benefit from the changing outlook for oil-linked economies by reducing this underweight somewhat.”

 

4. The UK conundrum

The manager also highlights how difficult a year 2016 has been for active UK equity funds, with the average member of the IA UK All Companies sector lagging the FTSE All Share by close to 5 percentage points. The bulk of the index’s returns have come from the FTSE 100, where international-facing companies have benefitted from a weaker sterling.

Performance of sector vs index over 2016

 

Source: FE Analytics

“History shows the average active UK manager underperforms when mid-cap companies suffer significant underperformance. Relative to other developed equity markets the FTSE All-Share is uniquely concentrated. Indeed, the top 10 stocks constitute over 40 per cent of the overall weight of the FTSE All-Share,” Onuekwusi said.

“To outperform, UK equity managers will typically have to descend the capitalisation spectrum and adopt more mid-cap risk. However, as sterling falls – which it has been doing both pre- and post-EU referendum – larger caps benefit because some 75-80 per cent of their revenues are driven from overseas, versus only around 50 per cent for many mid-caps. If sterling continues to weaken, this trend of underperformance is likely to continue – which would of course benefit an index strategy over active funds.”

“While many investors have benefitted from a structurally lower weighting to mid-caps in favour of large-caps in 2016, they may want to start increasing their mid-cap exposure again if they believe we are coming to the end of sterling weakness. However, it is important to remain vigilant of the risks, because a weighting to a UK index fund - and specifically, a large-cap strategy - could help to hedge any further Brexit uncertainty over the medium term.”

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.