The surprise outcome of the UK’s decision to leave the European Union has indicated that political will is quickly deteriorating.
That is the view of Franklin Templeton’s Global Macro CIO Michael Hasenstab.
Writing in his latest post from the ‘Beyond Bulls & Bears’ blog, the blockbuster bond manager said the biggest impact following Brexit, is what will happen to Europe if this is an indication of a rise in populist, nationalist sentiment throughout the whole European continent against the EU and the Eurozone project.
‘Going forward I think we are going to see more referendums and more nationalist parties advocating exits which will create a tremendous amount of volatility and a difficult period in the Eurozone.’
Hasenstab who runs several funds at Franklin Templeton including the Templeton Global Total Return fund said the political risk is something that investors need to take into account more.
‘We have been continuously monitoring the market activity and have been looking to potentially take advantage of some of the post-vote dislocations we have seen.’
‘A number of emerging markets had initially fallen 5% to 7% but began to retain some lost ground as things began to normalise later during June 24 trading period.’
Hasenstab said the shock to Europe is one that could be a little more permanent and people will likely begin to question investments in the Eurozone over the long term.
‘We remain convinced the Euro is likely to weaken.’
‘Over the next weekend and couple of weeks, once people begin to distil what really matters surrounding the outcome of this event for Europe and the rest of the world, I think that some of those risk assets in emerging markets that sold off will begin to recover.’
In regards to temporary effects, Hasenstab said when you see a shock such as this, you have massive risk aversion.
‘We saw this in the post-vote rally in US Treasuries and in the Japanese yen, and in the sell-off of emerging market assets.’
‘These are temporary effects and over the course of the next month or so the market trends may begin to reverse as people realise this is a long-term challenge for the Eurozone.’