Category Archives: Brexit


As The S&P 500 Reaches New Highs, Asset Inflation Continues

  • All factors are indicating an artificially created asset inflation.
  • Earnings are expected to decline with economic outlook being constantly revised downwards.
  • Gold is gaining alongside stocks which confirms that all assets are inflated.


Amidst all the turmoil from BREXIT, negative interest rates and global downward economic growth forecasts, the S&P 500 has reached a new high. On Monday it closed at 2,137.16 points, overtaking the previous high of 2,130.82 from May 21, 2015. The Monday record was surpassed again on Tuesday and Wednesday, with Wednesday closing at 2,152.43.

figure 1 s and p 500
Figure 1: S&P 500 in the last 5 years. Source: Bloomberg.

This new high isn’t significant in terms of real returns as the market hasn’t really gone anywhere in the last 14 months, but it is significant from a psychological and confidence perspective. In this article we are going to look for the breakout reasons and fundamentals, and analyze potential risks.


It’s pretty straightforward: if earnings grow then the S&P 500 is also supposed to grow, if earnings decline and the S&P 500 grows we can assume we are in a bubble. At the moment, earnings are not growing and this earnings season will probably be the fifth consecutive quarterly earnings decline. In total, net income is down 18% since its 2014 high.

figure 2 earnigs
Figure 2: S&P 500 index and earnings. Source: Bloomberg.

The 18% decline isn’t that bad when compared to the average 36% earnings decline in recessions since 1936, but currently we are not even close to being in a recession.

Investors seem optimistic and willing to pay a hefty premium for stocks. The current S&P 500 PE ratio is approaching 25 and it has been higher than 25 on only two occasions in the last 100 years, in the dotcom bubble and in the midst of the Great Recession when earnings plunged.

figure 3 S&P 500 pe ratio
Figure 3: S&P 500 PE ratio. Source: Multpl.

As earnings are not growing and fundamentals are deteriorating, there must be something else that creates investor optimism.

Economic Data

As stock prices reflect future expectations, a look at GDP forecasts will give a good perspective on the rationality of the above valuations. In June, well before the BREXIT vote, the World Bank lowered its global growth forecast from 2.9% to 2.4% indicating more trouble for corporations. The International Monetary Fund has cut its forecast for the U.S. from 2.4% to 2.2% for 2016 but expects a pickup to 2.5% in 2017, while the FED expects moderate and stable economic growth at 2% for the next few years. In greater detail, the media highly promoted the 287,000 new jobs added recently but failed to focus on the increased unemployment rate from 4.7% to 4.9%.

One might wonder if the above mentioned data is enough to sustain a PE ratio of 25 as historically the economy has grown faster than 2% and the S&P 500 has had lower PE ratios, again an indication that asset prices are inflated.

Low Bond Yields 

The inflation in asset prices is especially visible in fixed income investments. With 30% of global sovereign debt charging a negative yield, investors push bond prices higher and higher in a desperate search for positive yields. This is further enhanced by the central banks of Europe and Japan actively buying corporate bonds on the market, and even stocks for the latter. As long as central banks relentlessly continue buying securities, it is very difficult for stock markets to experience substantial declines which means that small risks are being smoothed out by monetary policies while the big black looming risk grows bigger and bigger.

Not only that, but capital flows toward fixed income funds are reaching record highs.

figure 4 etf flows
Figure 4: Cumulative fixed income ETP flows in billions. Source: Bloomberg.

S&P 500 Sector Performance

One could argue that the above mentioned corporate earnings decline is mostly the result of lower commodity prices and declining earnings in the energy sector, but only 4 of 10 sectors will see earnings growth in the coming earnings season.

figure 4 earnings per sector
Figure 5: S&P 500 expected earnings growth per sector. Source: FACTSET.

Despite that the energy sector is expecting the worst decline in earnings, its performance in the last 6 months has been the best as things have stabilized a bit. On the other hand, the fact that utilities, energy and materials were the best performing sectors in the last 3 months shows that investors are looking for investments that protect against inflation and have constant, recession-proof yields.

figure 5 sector spdr
Figure 6: S&P 500 sector performance in the last 6 months. Source: Sector SPDR.

The same conclusion related to the search for inflation protective assets can be reached by the looking at the continuing surge in gold prices.

figure 6 gold prices
Figure 7: Gold prices in the last 12 months. Source: Bloomberg.

Gold is usually not correlated with stocks, but from the chart above we can see that both gold and stocks are increasing which again leads toward the conclusion that all asset prices are inflated.

What To Do

It is difficult to be smart in such an artificially created situation, but stock picking and “stick to what you know” might be the best option. You must evaluate the companies in your portfolio and identify how they will perform in the uncertain times that are ahead as asset inflation, possible real inflation in the future, and higher rates will wreak havoc among securities.

Now is the time to be smart. Investors should grasp the opportunities given by the high liquidity but at the same time think of the potential risks if anything changes in the current financial monetary easing system.



Could the Economic Climate in Europe Be Contagious?

  • The first hard data after the BREXIT won’t be available until October, but property funds are already frozen.
  • The decline of the pound will lower UK GDP and will spill over into Europe.
  • Italian banks are in trouble as 25% of GDP are nonperforming loans.


As two weeks have passed since the BREXIT debacle, most heads have cooled off and we can calmly look at the current situation in Europe, the repercussions of BREXIT and contagion risks. It is important to analyze the full potential impact of the BREXIT by analyzing the stability of the European financial system, business investments, hiring and the political risk premium.

As BREXIT was popular primarily amongst the older population, politicians campaigned on a platform that promised that the money currently being spent on the EU would be diverted into the UK’s national healthcare system, the economic implications of which could be huge.

Situation in Europe

Europe could have done without this BREXIT vote as the last recession just ended in 2013 and the economic consequences will certainly have a detrimental effect on the growth experienced in the last two years.

figure 1 europe
Figure 1: European Union GDP annual growth rate. Source: Trading Economics.

We shouldn’t forget that the UK is still part of the EU and will remain so until all the administrative issues are resolved, presumably for the next two years or possibly even for the next four years. As GDP is always measured in dollars and the pound fell by about 10% in the last quarter in relation to the dollar, we can expect a decline in UK GDP (measured in dollars) similar to what was experienced when the UK left the European Exchange Rate Mechanism in 1992.

figure 2 UK gdp 1980s, 90s
Figure 2: UK GDP in the 1980, 90s. Source: Economics Help.

What saved the UK economy back then was a cut in interest rates, but as the current interest rate is 0.5%, not much can be done there. As the UK’s GDP is $2.8 trillion, it makes up about 15% of the EU economy, so a decline in the UK’s GDP will certainly have a detrimental effect on the EU GDP. An economic slowdown would make credit agencies downgrade the UK or possibly other countries in Europe and thus would create a domino effect of bad news. Moody’s has already expressed concerns about the BREXIT and stated that it will probably change its outlook for the UK from “stable” to “negative,” and Fitch predicts 2017 to be a record year for sovereign downgrades.

In addition to the impact on its currency, the UK economy will be hit by changes in the employment market as well. Some businesses will be forced to move their London branches to elsewhere in Europe. HSBC bank has announced that it will move 1,000 trading jobs to Paris, the same is true for Morgan Stanley, and let’s not forget that London is the European center for financial start-ups which will also have to be moved to somewhere in the EU to serve their primary markets.

The first impact the BREXIT has had is on UK real estate. $23 billion worth of assets in property funds have been frozen for withdrawals. Aberdeen Asset Management marked down the value of its UK property fund by 17% and suspended redemptions with an explanation that this will give time for investors to reconsider. The reality behind this funny explanation is that there is simply not enough liquidity behind the assets for redemptions. A halt in liquidity is also one thing to worry about in Europe.

We won’t know the full impact of the BREXIT for some time as most of the data won’t be published until after Q3 2016 is over. As the BEXIT repercussions become more clear throughout this year, some other risks will emerge as investors become more risk averse in this uncertain European political and economic time.

Italy and Its Banks

In uncertain times, investors look for safety and are much more risk averse. Some assets that were once not considered risky suddenly become risky. As investors withdraw their funds from the riskier assets, those assets consequently become even more risky as there is a lack of liquidity.

This is the situation with Italian banks. Not that Italian banks were ever considered that safe, but at this moment they might tip the stability of the European financial system. It is assumed that Italian banks sit on $401 billion of bad debt, equivalent to a quarter of the country’s GDP. For comparison, the percentage of U.S. nonperforming loans is 1.15% which is around $103 billion or 0.6% of U.S. GDP, thus 42 times less than in Italy which clearly implies that Italy is about to implode if the ECB does not intervene.

On top of Italy’s banking troubles, the country’s own prime minister certainly doesn’t know how to put a fire out. Instead of keeping things as calm as possible he immaturely attacks other EU banks stating that their derivatives exposure is a hundred times bigger problem than the Italian debt issue.

With the BREXIT and other populist leanings—including in Italy as evidenced by the statements by its Prime Minister mentioned above—the European markets should be terrible. In such a climate you’d think there would be plenty of bargains around, but the opposite is true.


All of the above may settle down, but the stock market in Europe is highly overvalued for such a political and financial mess. If you look at the iShares MSCI Italy Capped ETF (NYSEArca: EWI) it has a PE ratio of 12.79 but the biggest holdings are oil ENI which is losing money, highly indebted utilities ENEL and the biggest Italian bank Intesa San Paolo which will be in for a wild ride if a banking crisis hits Italy. Therefore, Italy and all other European companies are far overvalued for the potential risks.

figure 3 Europe PE
Figure 3: European PE ratios. Source: Star Capital.

It wouldn’t be a surprise if the above PE ratios are more than halved in the next year or two as a consequence of the BREXIT, which is just a symptom, and debt which is the real disease. As the ECB is buying corporate bonds on the open markets, even the ECB might be in trouble as there is nobody who can bail the ECB out.


The expected sovereign downgrades will push the dollar higher as global investors will seek safety which should negatively impact U.S. exports. Any kind of potential European crisis will bring turmoil to U.S. markets but investors can prepare for that by carefully assessing the situation in Europe.

Traders may want to seize the swings between bad news and ECB interventions, and long term traders might just want to short Europe as a weaker euro will make it easier to cover in dollars.

In general, we can expect uncertain times ahead of us. The last European financial crisis in 2012 with Greece as a culprit resulted in a European recession. The current situation doesn’t look much different, only this time Italy and the BREXIT will probably be the culprits.



BREXIT Aftermath: Where to Look for Returns & What to Avoid Now

  • The U.S. and Europe are overvalued, especially seeing the current political situation and economic fragility.
  • What’s about to hit Europe and the U.S. already hit emerging markets in 2015. There are opportunities in emerging markets now, but where?
  • Bonds seem the riskiest asset of all with no yield and huge potential downside.


After last week’s BREXIT vote the markets have been in a free fall with a slight recovery yesterday. But savvy investors have been expecting this and it has been a recurring theme at Investiv Daily that stocks are overvalued. In such an overvalued environment it is normal that inflated asset prices take a beating at any sign of future uncertainty.

As one’s misfortune is another’s fortune, this article is going to elaborate on what to look for and what to avoid in order to limit risks and maximize returns.

The U.S. Stock Market

The U.S. stock market is fully valued and therefore the decline should not have come as a surprise. The S&P 500 has been moving sideways for the last year and a half and many are expecting a recession. In such an environment the risks are high and the potential returns very low.

figure 1 pe earnings
Figure 1: S&P 500 PE ratio and earnings. Source: Multpl.

With a PE ratio of 24 and declining earnings, the only way for investors to realize capital gains by investing in the S&P 500 would be through the formation of an asset bubble. With the current political turmoil, slower U.S. productivity, lower employment participation and strong dollar, this seems like a very unlikely scenario.

On the other hand, those factors might start a recession that could easily lower the S&P 500 to the average historical PE ratio of 15 which would cause a 1,300 point, or 35% drop. Therefore, the conclusion is that the S&P 500 carries a lot of risks with limited upside.

Emerging Markets

Emerging markets were the thing to avoid in 2015, but they still possess long term factors that should make them the long term investment winners, especially if bought at these depressed prices. Let us focus on Brazil as an example.

Brazil was hit by various corruption scandals and by the deepest recession in the last two decades. But, Brazil is still a young country rich in natural resources and on the road to becoming part of the developed world, minor setbacks are normal and should be used as an investment opportunity.

figure 2 brazil GDP
Figure 2: Brazil’s GDP in billions of US dollars. Source: Trading Economics.

Brazil’s GDP grew from $1,107 billion to $2,346 billion in ten years which still represents a yearly average growth of 7.7%. As the market has already factored in the chance of a Brazil bankruptcy, the risks and rewards of investing there are opposite from what they are in the U.S., as there is no risk of a U.S. bankruptcy.

Brazil’s current CAPE (Cyclically adjusted 10 year average price earnings ratio) is currently 3 times undervalued at 8.2, while the S&P 500 has a CAPE ratio of 24.6. The undervaluation is probably the reason why Brazilian stocks have behaved very well in the last few days. The Brazilian stock index is still in positive territory for the month and year to date. On top of the relative stability, U.S. investors could also gain from currency benefits as the oversold real is slowly returning to its real exchange value toward the dollar.

figure 3 usd brl
Figure 3: USD vs BRL in the last year. Source: XE.

To conclude, Brazil represents a young, resource rich country where it seems that all that could go wrong did go wrong last year. More positive news than negative news should now be expected. On top of that, it is one of the most undervalued markets in the world.


The situation in Europe is similar if not worse than the one in the U.S. To put it simply, the markets are in an asset bubble as the European Central Bank has been issuing huge amounts of liquidity with the hope of faster economic growth and some inflation. It succeeded for a while but the BREXIT issue will for sure have a negative impact on current economic growth when coupled with the overvalued markets, the risks outweigh the rewards.

The average PE ratio in Italy is 31.5, Netherlands 28.5, United Kingdom 35.4 and Germany 19. There is also the euro issue where any political turmoil could weaken the euro and lower investment returns for U.S. investors.

Europe should be avoided until asset prices reflect the real state of the economy and the political situation, thus far below current prices, at least 50%.

Gold and Bonds

It is uncommon to put gold and bonds in the same basket but as they both have practically no yield with negative interest rates on the most secure government bonds, it seems the right choice.

Gold is currently at its year high as investors look for safety. The problem with gold is that it has no yield and most investors come too late to the party as gold primarily appreciates at maximum turmoil as it has done in the past few days.

figure 4 gold prices
Figure 4: Gold prices in the last year. Source: Bloomberg.

If political turmoil persists and inflation arrives due to the high liquidity, gold might be the winner, but any signs of stabilization would negatively affect gold. It can be concluded that gold represents a good hedge and could be a part of a well-diversified portfolio. Investors that seek a riskier investment than gold itself could go for gold mining stocks that offer a dividend yield and potential growth, though gold mining stocks also come with much more volatility.

As for government bonds, the risks seem to outweigh the rewards. Yes, it is possible to make capital gains if interest rates further decline, but this defies logic as there is no point in holding negative yielding bonds. On the other hand, if yields increase bonds could fall tremendously as a 100% increase in bond yields should consequently lower bond prices by 50%. Therefore, the current situation with bonds isn’t what’s typically assumed about bonds—low risk with high rewards—as right now they are high risk with low rewards.


At this point, after a 7-year bull market and high liquidity provided by central banks, investors should be wary of being overweight in the same things that were good 7 years ago. Many analysts have forgotten how to analyze risk as we have not seen a bear market since 2009, but this is exactly the time when one should look at risks before rewards. High asset prices and low yields mean that investors do not see much risk and are willing to pay hefty prices, but this is exactly the kind of situation that can bring lots of investment pains.

Any signs of recession, the continuation of the decline in corporate earnings, and a shift from the current investor’s perception that central banks are still able to save the markets with additional intervention, could easily send the stock market down by 30%. Assess your risks, estimate the rewards, and position your portfolio accordingly.


Is BREXIT Just Noise?

  • Markets fell on Friday but they are exactly where they have been in the last weeks.
  • BREXIT is noise, investors should focus on slower global growth and fragile financial systems.
  • The market is still overvalued in historical terms but there are some opportunities.


An avalanche of articles since last week’s BREXIT is forecasting terrible things for the world economy and financial markets especially. Most focus on the huge declines stock markets saw on Friday, but let us first take a closer look. The UK FTSE 100 index fell 3.15% to 6,138 points on Friday, but all-in-all it was a positive week as last week started with the FTSE at 6,021 points.

20160627 BREXIT and other
Figure 1: UK FTSE 100 index in the last month. Source: Bloomberg.

Of course this is only the nominal decline. As the pound declined by 9% toward the dollar, FTSE losses for U.S. investors ended up at 13% in total on Friday.

The S&P 500 also fell 3.59% on Friday, but this was mostly due to the appreciating dollar. As the dollar appreciates, U.S. corporations see their international earnings deteriorate as more than 30% of revenues comes from abroad.

figure 2 dollar spot
Figure 2: Dollar index spot. Source: Bloomberg.

But again, the dollar is just back to where it was at the beginning of the month and the S&P 500 to where it was exactly one month ago on May 23. The point of this introduction is to make investors aware of the difference between noise and real structural significant influences.

What’s Important for an Investor and What’s Just Noise

In the BREXIT aftermath you will be bombarded with various crazy headlines like “FREXIT” (France leaving EU), but don’t let this move your focus from the important things. The important things are that the BREXIT will for sure have a negative impact on the already negative trend of slowing global economic growth. The World Bank has already revised its global growth expectation downwards from 2.9% to 2.4%. The BREXIT will further lower the amount of investments in and from the UK and consequently, Europe. This might push global growth even lower and keep growth in Europe subdued.

figure 3 real gdp growth
Figure 3: Global, Europe and advanced economies real GDP growth expectation. Source: World Bank.

Slower global economic growth and activity will have an impact on every aspect of economic life. But, as usual, central banks will do their best to keep things stable by adding more liquidity. The European Central Bank issued a press release immediately after the BREXIT vote stating that it “stands ready to provide additional liquidity, if needed, in euro and foreign currencies.”

This policy of constant liquidity adding by central banks has been working well in the last seven years but involves some risks. The major risk is that markets change their perspective on monetary policy as an important enough factor for market stability. As soon as central banks become unable to protect the markets with their added liquidity there is nothing to stop the markets from a free fall. Also, the increased liquidity provided by banks with no economic traction would spur inflation. Such a scenario could bring a rare economic situation called stagflation: high inflation and economic stagnation.

The second risk is also related to monetary policy and BREXIT. BREXIT being the cause and monetary policy being the reason. The low interest rates and high liquidity has brought high levels of debt globally and uncertainties about whether the central banks are going to be able to keep things stable without spurring too much inflation in an environment of continuous abundance of liquidity. This risk influenced most European banks to fall between 10% and 15% last Friday, but this was only the tip of the iceberg as the above mentioned reason lowered their share prices by about 50% in the last year.

figure 4 European banks an U.S.
Figure 4: European banks stock price in last two years. Source: Yahoo Finance.

UK Barclays, German Deutsche bank and Italian Intesa all fell by about 50% or more in the last year. The best performing bank in the above chart is Wells Fargo which has fallen only 20% in the last year. This weakness in the financial sector signals that the provided liquidity is still keeping the markets stable, but the decline of bank shares indicates that the markets are not as healthy as they used to be.

The most important thing of all for corporations and their stock prices are, of course, earnings. The stronger dollar will undoubtedly lower corporate earnings and make the already historically high valuations look even more overvalued.

figure 5 sandp multipl
Figure 5: S&P 500 PE ratio. Source: Multpl.

As the above figure shows, the S&P 500 PE ratio has only been higher than the current level on a few occasions. Recent historical examples of higher or similar PE ratios are the 1960s bull market that resulted in a decade long 1970s bear market, and the dot-com bubble and bust. The 2009 spike is related to the 2009 crisis that lowered earnings and not to market overvaluation.

Conclusion and What Can Be Done

In an environment with huge liquidity, high valuations and uncertain economic prospects, there are some things an investor can do. If the high liquidity ignites inflation, it is always good to be exposed to assets whose quantity is fixed. Such assets are commodities. Precious metals in particular as their value increases with economic turmoil. All other commodities should benefit if inflation is ignited and the global economy continues to grow.

An investor can look for companies with low PE ratios and stable non-cyclical revenues, like utilities, communications or consumer staples. It is not easy to find companies like that in this overvalued market but there are a few—like AT&T (NYSE: T) or Southern Company (NYSE: SO)—that look attractive with their PE ratios below 20 and dividend yields north of 4%. A PE ratio below the average does not mean that the price of those stocks will not go down in a bear market.

In any case, investors should brace for volatility ahead as negative economic repercussions keep constantly coming up. Now it is the BREXIT, not so long ago we had the Chinese slowdown crisis in August 2015, low oil prices in January 2016 and as more such things are bound to happen in the fragile, overvalued, highly liquid markets, every investor should prepare for volatility.


Is Global Recession On Its Way? Brexit May Be A Warning Sign…

  • Global GDP growth rates are stalling even with increased monetary stimulus.
  • There are several potential recession triggers.
  • It is important to assess the risks a portfolio runs as no one can know when a recession will come, but eventually it will as it always has.


The main FED goals are sustainable economic growth and full employment. In order to achieve those goals, the FED has decided not to increase interest rates as the economy is still relatively weak and employment has been slowing down. Not only that, but the expectation of future interest rate increases has been revised downwards.

This brings several consequences. In case of an economic downturn, which would be completely normal as we have not had one in the last 7 years, the FED has no maneuvering space left to help the economy as the interest rates are still at recession levels.

1 figure gdp to date
Figure 1: U.S. GDP growth to date. Source: Multpl.

As the last recession was 7 years ago and every economy is cyclical, we should not be surprised if a recession comes along. No one can know when this will happen as recessions always come unannounced, but we can take a look at the risks that can trigger a recession and the consequences of it.

Potential Recession Triggers


A vote in favor of the U.K. to leave the EU might influence some longer term market disruptions as London is the European financial center. The U.S. Treasury Secretary recently issued a warning stating that the global economy would be damaged if the U.K. leaves. The recent polls show a scary shift toward a leave.

2 figure brexit
Figure 2: Brexit polls. Source: Financial Times.

The ‘remain’ has always been greater than the ‘leave,’ but it seems that the undecided are turning toward a leave. Next week will be an interesting one as we will see the long awaited Brexit vote confirmed, be it a leave or a remain.

Another Bad Summer in China

Last summer we had the first meaningful stock market fall in the last 7 years as the Chinese stock market precipitated on weaker Chinese growth.

3 figure China GDP growth
Figure 3: Chinese GDP growth per quarter. Source: Trading Economics.

As China is increasing its debt levels in order to force economic growth, the long term perspective is one where if all goes well, China will have stable growth levels but any global shock like the above Brexit might influence further slowing down and a global deflation spiral.

4 figure china debt to gdp
Figure 4: Chinese debt to GDP. Source: Trading Economics.

Debt usually means trying to hold on to the status quo until there is liquidity. The above increases in Chinese GDP show that China is desperate to keep its growth rates as it might implode without high growth rates.

As China and all other economies are dependent on global trading, any indication of global isolation would quickly spur discomfort into the market and this brings us to the next possible trigger.

U.S. Isolationist Tones

Currently Clinton is ahead in the polls but the Brexit example shows how we cannot bet on polls. If Trump’s isolationist rhetoric is more than just election tactics this could have a severe impact on U.S. trade and global economics. History has proved that any kind of isolation is detrimental to economic growth and wellbeing, and the current high standard we are enjoying is a result of global integration increasing its speed in the last three decades.

Global Monetary Policies Imbalances

With the FED slowing down, this is less of a concern as the higher U.S. interest rates would have strengthened the dollar and lowered U.S. exports. Everything produced in the U.S. would have been more expensive and U.S. corporate earnings would have been lower in dollar amounts.

Countries like India or Brazil, where interest rates are relatively high, are still not such a big influence on the global economy, but an economic rebound or inflationary pressure in one of the global economic pillars like Europe or the U.S. would trigger worldwide financial instability.

5 figure global interest rates
Figure 5: Global interest rates are at historical minimums. Source: Trading Economics.

The event of such a situation is highly unlikely especially after the FED has slowed down with its interest rate plans and the situation in Europe is not indicating economic exuberance.


Europe is the next risk factor for global markets. Even if we haven’t had a ‘Greek’ moment or a bank crisis for a while as the European economy is growing, that growth is still not stellar and has already peaked.

6 figure EU growth
Figure 6: European GDP growth. Source: Trading Economics.

EU growth has reached 2% in 2015 but is already declining and sits at 1.8% currently. This is a good number for Europe as the 2012/2013 recession is not far away, but the growth is fueled by increased debt levels and the non-performing debt ratios are scary for EU banks.

6 figure non performing loans
Figure 7: Non-performing debt ratios for EU banks. Source: European Central Bank.

For comparison, the average U.S. non-performing loans are at 1.67% which is much lower than the EU 7%.

7 figure us non performing loans
Figure 8: U.S. non-performing loans. Source: Statista.

Therefore, Europe not only has the ‘Brexit’ issue as a potential destabilizer but also bank fragility and the fragility of the whole economy.

Understanding of Risk

The last risk related to global markets is the assessment of risk investors have. With yields at historical lows, investors might be losing the perception of risk, especially as central banks run to save the markets as soon as any decline is anticipated.

A shift in the perception of risk might be the biggest risk of all as we have seen that after the FED decided to keep rates steady and lower for a longer period of time, the DOW index declined and did not, as usual, increase based on continued FED stimulus.


The scope of this article is not to be the chicken little but to objectively assess real risks to your portfolio. A recession would be catastrophic at this moment as central banks are out of firepower. Maybe they can keep markets at a permanent high level with low interest rates, but there are several structural and cyclical longer term forces that come into play here and cannot be influenced by monetary policy.

The U.S. is approaching full employment, corporate earnings and investments have been declining for a while even though interest rates are still low. As we already mentioned, we cannot know when any of the above described risks will kick in, maybe even next week with Brexit, or not in the next few years.

Eventually a recession will come, as it always does, unannounced and surprising, nobody knows when but it is good to think of how risky is your portfolio in relation to that and if maybe the same returns can be reached with less risk.



Brexit – Much Ado About Nothing

  • The Brexit referendum has already caused trouble for the UK economy with slower growth and a falling pound.
  • Fortunately, polls show that the vote will be to stay in the EU.
  • Traders might take advantage of the situation as the pound still has lots of ground to recover to pre-Brexit levels.


It seems that Shakespeare is still very popular in the UK as the country is staging a referendum on whether or not to stay in the European Union (British exit = Brexit). This article is going to research if Brexit is just a comedy and much ado about nothing, or if there are some real threats to an exit vote.

The Brexit possibility was born when, in order to get more votes from Euro skeptics, the current UK prime minister David Cameron promised in the last elections that he would stage a referendum on whether the UK should remain in the EU or not if he were to be reelected. At that point is seemed like an innocuous issue, but it has now evolved into something pretty serious as it already has important consequences for the UK economy.

Current Situation and Influence on Markets

The first direct impact of Brexit fears is related to the British pound (GBP), once considered a global currency is currently moving like an emerging market currency.

1 figure usd GBP
Figure 1: USD per 1 GBP for the last 5 years. Source: XE.

The GBP declined from a high of 1.71 USD for 1 GBP to the current 1.44 in less than two years. A weaker pound should be good for the economy but that is not how the British economy is set up as it is very oriented to foreign investments. Since the last elections the British GDP has been growing but at a constantly slower rate.

2 figure gross domestic product
Figure 2: Gross domestic product – quarter on quarter growth. Source: UK Office for National Statistics.

One reason for the slowdown is that the UK is losing some foreign investments as the uncertainty with its political direction grows. This uncertainty quickly affected luxury London real estate, which was for a long time the Mecca for rich global investors that parked their money in expensive London flats but that practice has been fading. But there are several other potential threats to a Brexit than only luxury real estate.

Potential Situation in Case of a Brexit

As the Brexit is a purely political and not so much an economical issue, the consequences of a Brexit could be very detrimental. The issues that ignited the whole situation are, according to the BBC, the following: the ability of immigrants to send child benefits back to their home country, migrant welfare payments, keeping the pound, protection for the City of London as the financial center of the UK, control of their own borders, and savings on EU fees. On the other hand, the reasons for the UK to stay in the EU are the following: easiness to sell things in Europe, young and keen to work immigrants give a boost to the economy, and that the UK status in global politics would be damaged by the UK not being in the EU.

The Bank of England warned that the UK might go straight into a recession if a Brexit is voted in with a depressed pound and a rise in unemployment. The situation on the stock market is not of the rosiest either.

figure 3 FTSE
Figure 3: UK FTSE index. Source: Bloomberg.

The UK market chart does not look that bad with a loss of 14% in relation to the April 2015 high but when you add the depreciation of the GBP in relation to the dollar you get to a loss of 22%, and that shows how important it is to stay in EU for the UK. The losses have been larger but both the pound and the FTSE have recovered as Brexit polls indicate a vote to stay in the EU.

Current Polls 

The current polls are getting more positive as 46% of UK voters want to stay in the EU.

figure 4 polls
Figure 4: UK Brexit polls. Source: Financial Times.

Traders might take advantage of the situation as a vote to stay is getting more likely and the pound has still lots of terrain to regain in relation to pre-Brexit levels.


Shakespeare’s comedy Much Ado About Nothing is a perfect match for the explanation of the situation as a Brexit would be detrimental to the UK economy and future growth prospects and is not logical to outside viewers. The world is becoming more of a global market place where historical imperialistic attitudes do not fare well and have terrible results for the economy of an isolated nation. The hope is that the British people understand that and do not vote themselves out of the global economy, focus on real growth and production and leave the political bickering, rumors and intrigues to comedies, like it was the case in Shakespearian times. In the meantime, traders have a good opportunity to make some money by grasping the currency movements related to the referendum.