All Bets are Off – Changing our Rate Hike Outlook
The surprise outcome from the UK referendum has forced a revaluation of conventional thinking on practically all fronts of the global landscape, from social structure, to politics, to monetary policy and of course asset valuations. Our view is that we are just beginning to understand the ramifications of Brexit, and we in the strategy world will spend the better part of the summer looking down a complex set of decisions trees. Of course markets don’t have the luxury to wait for the outcome to all these scenarios and have moved sharply since last Friday. Given that we remain in uncharted territory with regard to how the actual exit process will evolve, we will leave those thoughts for futures reports when there is more information to consider. What we think is clear is that the social discord exhibited by the British voters is not particularly unique to the UK, with similar uprising possible throughout Europe and elsewhere. The US is not immune from this discord, and the Presidential elections will display how deeply and widespread that anger actually is. All of this signals an extended period of uncertainty, with a possible UK recession looming, global growth estimates at risk, and a continuation of the anemic growth that both the developed and emerging economies have found themselves in the last few years. From an investor’s perspective, these risks are compounded by generally expensive asset values, interest rates that are at or below the zero boundary in most of the developed world, waning monetary policy efficacy and weak fiscal authorities.