Speaking at a Legg Mason roundtable on the Brexit vote, Martin Currie portfolio manager Michael Browne said the “real opportunity” over the next six to 12 months will be “on the short side” – specifically, financials.
“The overall prognosis for the UK is obviously significantly worse than it is for the rest of Europe,” Mr Browne said.
“You could argue it’s joining some of the problems that the rest of Europe has already exhibited. But the rest of Europe could well see some opportunity sets, and some quite big opportunity sets if the currencies continue to depreciate as they are,” he said.
However, the state of the UK and European banks is a “rebounding negative for the overall economic situation”.
“We haven’t actually answered the underlying question, which is how to make banks profitable in a world of negative interest rates? I don’t think you can,” Mr Browne said.
As the UK economy moves into 2018, the banks will be facing “significant cuts to their margins”, he continued.
“You’re then starting to ask questions about the overall prospect for house building and other areas. This could prolong a period of economic gloom through a recession.
“That may well be exactly what our European colleagues want to see so they can force us back to the negotiating table in 2018 with a tail very firmly between legs,” Mr Browne said.
The impact of low or negative interest rates on the balance sheets of institutional investors – particularly insurers – is another big worry for Mr Browne.
“[Insurers with this exposure] could well become forced sellers of a number of assets. There is a pervasive, longer term negative flow issue,” he said.
“The flip side is that will exacerbate the size of pension fund holes, and a number of corporates who will become basically pension funds with businesses attached, desperately trying to repay them.
“This is very negative stuff, but that’s this extraordinary world of deflation and very low interest rates,” Mr Browne said.
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