Brexit — a political, not a financial, crisis



While the Brexit result of the EU referendum last week may be the biggest political crisis in the United Kingdom since the Second World War, this should not be conflated with a financial crisis in our view. Credit markets are not currently suggesting systemic risk in the banking sector or a move to a higher default rate regime for corporates — banks are in a relatively healthy place due to rigorous regulation and stress testing over the last few years.

Clearly the result is a significant blow to economic confidence/’animal spirits’ in the short term and will put at least a temporary brake on growth in the UK and perhaps Europe. Bank share prices have also been hurt and their willingness to lend remains muted. European companies are therefore likely to remain relatively conservative — more about dividends and conservative balance sheets than share buybacks/mergers and acquisitions (M&As). This business cycle continues to struggle to gain traction in Europe due to the constant political crises.
We believe that the Bank of England is likely to cut rates to 0% from 0.5% currently. The Governor, Mark Carney, has said that he does not want to take rates negative. We expect further credit easing eg, resurrecting the Funding for Lending scheme if needed and more quantitative easing (QE), possibly. With yet another central bank heading towards zero percent interest rates, this continues to fuel the ‘global’ grasp for income yielding assets we have written about in recent months.
The issue at stake as of today is clearly ‘how’ the UK exits. There are soft and hard versions of exit, with soft (maintaining access to the free trade area) being the preferable version for the economy. Would the Europeans allow it? Currently, the Germans appear to be taking a softer tone than the French.
While Brexit alone is not sufficient to derail the current low default rate picture – the number of businesses defaulting on their credit lines - we have to proceed cautiously. Events could take a different turn next week with some very important data due in the US, such as non-farm payrolls, and the Institute of Supply Management (ISM) and other Purchasing Managers’ Indices (PMIs). Should the data be poor, given the very poor non-farm payroll for May (38K), markets may quickly start to worry about a global recession.

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Henderson Diversified Income Trust plc

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

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Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

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Fund name changes

Please note that from the 15 December 2017 funds previously named Janus or Henderson have been renamed Janus Henderson. This change aligns our product names with our name, Janus Henderson Investors, following the merger of Janus Capital and Henderson Global Investors in May 2017.

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