As the world has been transfixed on the saga of Britain’s Brexit proceedings over the last two days, many were left wondering what the implications would be for equity markets.
While it appears that global markets largely priced in the likelihood of Theresa May’s deal being shot down in parliament, with the FTSE 100 ending up 40 points higher after the defeat, one economist has urged investors to see Brexit as a symptom of the larger economic issues facing the eurozone.
According to Jordan Eliseo, former chief economist of ABC Bullion and current markets analyst, investors should watch the eurozone carefully over the next 12 to 18 months as the slowdown in global growth poses a particular threat to European economies.
“My view is that Europe on the whole is basically on the verge of heading into a recession. Now that’s not because of Brexit, but Brexit doesn’t help the scenario though,” he told Nest Egg.
Evidence for recession in fundamentals
He said recent softening production and manufacturing figures from Germany are concerning, as the economy has traditionally been a bellwether for the entire eurozone.
“Brexit is the icing on the cake, as it were,” Mr Eliseo explained.
“If you look at German figures, the economy is still growing but it is at the slowest pace in several years. So, whilst they’re not in a recession at this point, it looks like they’re starting to head that way.”
He said that although the acceptance of the new deal Ms May will present to parliament on Monday (21 January) would likely increase investor confidence on the markets in the short term, the political and economic ramifications of the break from Europe in May will be yet another factor contributing to the slowdown across the continent.
“I think the bigger implications for this is it adds another spanner in the works to growth across the eurozone, and we’re already seeing in the eurozone that things are starting to slow down,” Mr Eliseo said.
“Whilst I’m not convinced that the financial market implications for Brexit short term will be as bad as some people think, the politics and the economics of it are very significant.”
Portfolios positioned defensively
He said it is important for investors with interests in European markets to position their allocations defensively until the outcome of continent-wide slowdown is revealed.
“When it comes to how to position portfolios for this year and beyond, it should encourage people to be a little more defensive,” Mr Eliseo advised.