‘This could lead to a global recession’: T. Rowe Price reacts to Brexit vote

Managers from T. Rowe Price , the $765bn global asset manager, react to the UK public’s decision to leave the European Union.

Arif Husain, head of international fixed income at T. Rowe Price :

“Those who believe Brexit is a UK problem are misunderstanding the impact it will have globally. They’re forgetting the impact that Greece had – and Greece is much smaller than the UK, and not a financial centre. “The vote to leave could result in a global recession. It’s likely that the chances of a global recession have risen above 50%. “For investors, the money was to be made in the run-up to the referendum from all the volatility that was occurring. It will be harder to make money now.”

Quentin Fitzsimmons, senior fixed income portfolio manager at T. Rowe Price :

“Sterling is highly vulnerable, as UK business confidence is likely to fall and the country already has a large current account deficit. However, fears that the pound could move toward parity with the US dollar are unfounded. Sterling is a reserve currency, is widely traded, and is a store of value – when it falls to a certain point there will be buyers, and that will prompt a correction. It will certainly weaken, but fears that it will tumble endlessly down are unfounded. However, the prospects of a cut to UK interest rates have risen as a result of the vote to leave. We adopted some modest hedging positions ahead of the vote, but did not take a major bet on the outcome.

“The power of economic self-interest should not be underestimated. France will probably want to make it very difficult for UK financial services firms to operate on the Continent. However, Germany might be inclined to be more flexible because its car industry is heavily reliant on exports to the UK and it would not want to lose that trade. Different countries in Europe have varying levels of trade-dependency with the UK, which could make negotiations within the EU very complicated. It could be divisive.

“The nature of the UK’s negotiations with the EU will also be complicated by the fact that, having campaigned on the losing side, Prime Minister David Cameron International is now in a highly vulnerable position.”

Dean Tenerelli, European equity portfolio manager at T. Rowe Price :

“There will be a protracted period of uncertainty, not only in UK and European financial markets, but also globally. Markets do not like uncertainty. The UK is the first member to leave the EU, so there is no template to follow. There are so many variables that it’s hard to predict the economic impact with any level of conviction, but I anticipate a deterioration of the UK growth outlook.

“In the near term, investors will likely benefit from holding companies that operate across different regions. Despite the uncertainty of the period ahead, multinational companies with significant international earnings will benefit from the decline in sterling as the value of their earnings will increase. “Throughout the campaign period our message has been ‘business as usual,’ and this message remains unchanged now. We see little merit in trying to predict uncertain outcomes and have not sought to adjust the portfolio composition in any way that is not aligned with our investment philosophy and process.”

David Stanley, fixed income portfolio manager at T. Rowe Price :

“Spreads on UK banks were widening before the vote – and they’re going to widen even further now. But anything that is perceived as risky will also be hit – most UK and European assets will be marked down. Sterling-denominated corporates, as well as those issued by UK companies denominated in other currencies, will weaken.

“The ECB’s corporate bond-buying program should provide some strong technical support for European investment-grade issuers. Spreads will widen, but less so than if the program did not exist, and the European investment-grade market should outperform the UK market, and possibly even the US market. “One of the key areas of differentiation is between companies that have more or less UK exposure. UK-domiciled companies that derive the majority of their earnings from mainland Europe may initially weaken along with everything else, but in reality they are less at risk and could therefore be a good buying opportunity. In addition, US and European companies that issue in sterling will be hit hard. This will present a very good opportunity to buy high-quality corporates in sterling rather than euros or dollars, then hedge them back to their base currencies.”

Mike Della Vedova, European high yield bond portfolio manager at T. Rowe Price :

“Capital markets will become more inward-looking. Overseas investors will be less likely to invest in UK corporates, making it harder for those companies to raise debt. UK companies’ access to global capital is likely to be reduced, meaning they’ll have to raise more from the UK market.” “The EU will want the contrast between membership and non-membership to be as stark as possible. In practice this will mean propping up the European market using any means at its disposal in order to make life rosy for the remaining members—it will also mean making life hard for the UK.”

“Global investors may look toward the US, even though it is further through the credit cycle and potentially faces more defaults than the European market. This will negatively impact European high yield, but it will also create a buying opportunity. Our aim is to look beyond the broad sell-off and identify those names where we believe there has been a negative overreaction. For example, UK companies that do not need to import from overseas will be less affected by the decline in sterling and will be more insulated against the downturn.”