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By Joyce Huang - March 14, 2019
U.K. policymakers cast three Brexit votes this week. Yet, the terms governing the U.K.’s exit from the European Union (EU) remain unclear, creating continued uncertainty for investors.
The U.K. bond market’s reaction has been muted, with the yields on the 10-year and two-year U.K. government bonds remaining steady near 1.20% and 0.75%, respectively. The British pound strengthened to a nearly two-year high versus the euro, but some of this likely reflects the recent dovish stance from the European Central Bank.
Early in the week, Prime Minister Theresa May suffered her second Brexit-related defeat. Parliament once again rejected the divorce deal she negotiated with the EU. On the following day, policymakers took a no-deal Brexit off the table, throwing Prime Minister May’s plan and the March 29 exit deadline into confusion.
The vote rejecting a no-deal Brexit reduces the prospect of a chaotic departure—a worst-case-scenario for businesses, investors and the U.K. economy. However, the vote is not legally binding, leaving Prime Minister May with the option to continue running down the clock to a no-deal default on March 29. That option seems unlikely, though, given Parliament voted Thursday to extend the Brexit deadline for at least three months. But the new June 30 deadline applies only if policymakers agree to the prime minister’s exit proposal by March 20.
What’s more, the other 27 EU members must unanimously approve any Brexit extension. If Parliament passes a deal next week, it’s likely the EU will grant the three-month extension, giving all parties time to implement the plan. If U.K. policymakers fail to reach an exit agreement, the British government must obtain EU approval to extend the deadline further. Under this scenario, EU member nations will vote on the Brexit extension at a summit that begins March 21. A rejection from the EU likely would trigger a no-deal Brexit, effective on the original, legally binding March 29 deadline. And even if the EU agrees to an extension, it can impose restrictions around the new exit date.
Extending the U.K.’s departure deadline beyond March 29 also opens the possibility of a second referendum on Brexit. It remains unclear, though, whether voters would overturn the original June 2016 referendum that set in motion the U.K.’s exit from the EU.
As we’ve witnessed over the last several months, securing a departure deal that satisfies all the competing factions is a momentous challenge. Among considerable fallout, the process has led to heightened market volatility and widespread uncertainty for businesses and investors. Although policymakers likely will extend the departure deadline, it remains unclear whether they will use this time to continue negotiating a deal, prepare for a no-deal exit (not legally ruled out) or announce a second referendum.
In response to ongoing Brexit-related uncertainty and volatility, our fixed-income portfolio managers have reduced exposure to risk in the U.K. and Europe. Specifically, we are avoiding U.K. and European corporate bonds with close ties to Brexit-related volatility, including select holdings in the industrial and financial sectors. Even if policymakers secure a deal and a smooth separation with the EU, we believe a rally among corporate bonds remains unlikely. Therefore, we currently don’t see much value in U.K. credit sectors.
As always, we continue to base our investments on fundamental factors. For example, we’re maintaining short positions in U.K. and European interest rates, which remain unusually low. The difference in rates between the U.S. and the U.K. and Europe is historically wide. We believe our short position would benefit from a smooth Brexit, as U.K. and European rates likely would rise.
Overall, though, we don’t believe any potential Brexit outcomes will have a dramatic effect on our U.K. and European holdings. Until the uncertainty fades, volatility likely will remain heightened, underscoring the need for engaged investment management to avoid pitfalls and uncover opportunities.
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Last week’s escalation in U.S.-China trade tensions sent stocks plunging. Here, American Century’s experts address the likely effects on market direction and global trade.
May 13, 2019
U.K. policymakers cast three Brexit votes this week. Yet, the terms governing the U.K.’s exit from the EU continue to remain unclear.
March 14, 2019
The Brexit deal failed to make it through Parliament for the second time in five weeks. Find out what this means for financial markets.
January 17, 2019
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
Generally, as interest rates rise, the value of the securities held in the fund will decline. The opposite is true when interest rates decline.
Fund(s) shown may take short positions. A short position arises when the fund sells stock that it does not own but was borrowed in anticipation that the market price of the stock will decline. If the market price declines, the fund can replace the borrowed stock at a lower price and capture the value represented by the difference between the higher sale price and the lower replacement price. Conversely, if the price of the stock goes up after the fund borrows the stock, the fund will lose money because it will have to pay more to replace the borrowed stock than it received when it sold the stock short. Any loss will be increased by the amount of compensation, interest or dividends, and transaction costs the fund must pay to the lender of the borrowed security. In addition, because the fund's loss on a short sale stems from increases in the value of the stock sold short, the extent of such loss, like the price of the stock sold short, is theoretically unlimited. By contrast, a fund's loss on a long position arises from decreases in the value of the stock and therefore is limited by the fact that a stock's value cannot drop below zero. In addition, the fund may not be able to close out a short position at a particular time or price advantageous to the fund and there is some risk the lender of the stock sold short will terminate the loan at an inopportune time.