Investors predicting political events in the end of 2016 and into the first half of 2017 will trigger the European Union’s demise should exit risk assets globally, according to Neuberger Berman’s managing director for high yield Andrew Wilmont.
The UK’s vote to leave the European Union has prompted speculation that other members may exit, which has been compounded by uncertainty surrounding elections and referenda taking place at the end of this year and in the first half of 2017.
Austria goes to the polls in October, Italy has a referendum on constitutional reform in December, before Germany and France hold general elections next year.
“It seems these referenda aren’t going well at the moment,” Wilmont says, pointing to the Hungarian anti-refugee referendum and Colombia’s failed referendum on securing a peace deal, not to mention the outcome of the Brexit vote “depending on what you chose”.
But Wilmont says it is an “outlier risk to think the whole thing will disintegrate”.
“If you truly believe that you shouldn’t be investing in risk assets.”
Instead Wilmont suggests investors convinced the European Union will implode in the next six months should be in “cash, gold, government bonds, those kind of assets”.
“Obviously if you’re wrong it’s a very expensive trade to be in.”
AJ Bell investment director Russ Mould agrees that exiting risk assets is a “sensible strategy” for anyone who believes the EU is about to fall apart. “But I think there is so much political will behind the European Union project I can’t see it coming to that.”
While Mould says the rise of populist politics, as seen in the Brexit vote, as well as the rise of far-right parties such as Germany’s AfD and France’s National Front, is a risk, he says the European project has been “more robust than anyone imagined” having held together during the Greece crisis and the euro crisis.
Wilmont says overall he does not consider European countries are “doing too badly” with Germany and northern Europe doing well and France and Spain growing “although from a very low base”.
“It seems even Greece will be growing again in the end of 2016 and then in 2017, which is fairly amazing,” Wilmont says.
“Would it be nice if they grew even faster? Sure, but to be honest in high yield you don’t need huge growth. If you have huge growth you have to be in equities because then you’ll benefit from that growth.”
Mould says despite political crises grabbing headlines in Europe over the last seven years, in equities “patient investors” have been rewarded.