Turmoil likely to lead to buying opportunities

The Brexit-induced panic on financial makers will probably lead to buying opportunities, although maybe not just yet, Craigs Investment Partners broker Chris Timms says.

Worries about the economic impact of Britain leaving the European Union have gripped financial markets again, with oil prices down 5% and commodity currencies suffering.

United Kingdom property funds have been hit and the British pound has plunged to a 31-year low, steering investors into the safety of the US currency.

Mr Timms said investors were finally waking up to the harsh reality of their country's decision to leave the EU and the dominoes had only begun to fall.

Three British commercial property funds had suspended trading within 24 hours, with concerns about trade, investment and business confidence mounting.

US government bond yields reached record lows as investors found refuge in the perceived safety of treasuries and uncertainty from Britain's vote to exit the EU fuelled worries about a global economic slowdown.

Mr Timms said Britons would start to see their property values fall in the coming months, creating greater reasons for consumer retrenchment.

There was no question about Brexit putting significant stress on the financial sector and property funds were only the first to feel the pain. Other sectors would start to implode, creating greater pressure on the UK economy and the British pound, he said.

"Brexit is a friction on economic activity and that's bad for banks,'' Brian Battle, director of trading at Performance Trust Capital Partners in Chicago, said in a market note.

"Low interest rates are horrible for financials, specifically for banks. The spread between where they borrow and where they lend is getting closer together.''

In his investment overview, Mr Timms said UK and European shares seemed most at risk of a short-term under-performance. The FTSE100 in the UK, which contained larger multinationals benefiting from a lower pound, should do better than the FTSE250, which contained companies with greater domestic exposure.

"We would expect the US to be more insulated overall given many sectors are domestically focused. The New Zealand market will also be somewhat shielded, although we should still expect to follow trends.''

The pound and the euro were likely to remain weak but the traditional safe havens, such as the US dollar and the Japanese yen, would attract investor interest, he said.

Interest rates were likely to remain low, or potentially go even lower. Despite seemingly high valuations and yields that were already very low, Craigs saw further strength in good quality bonds and fixed interest.

Although European politics had become more uncertain as a result of the Brexit decision, the outlook for Japan had improved, Mr Timms said.

Japan's economy and sharemarket, which included many exporters, had been suffering of late from the impact of a very strong currency driven by the safe-haven status of the yen.

The market turmoil caused by the Brexit vote had given Japan an excuse to intervene in its currency market to prevent further increases, he said.

"We believe it is inevitable the Japanese central bank takes further action and expect this to be a catalyst for outperformance over the medium term.''

The recent weakness in Japanese equities and the strength in the yen were buying opportunities and Craigs' favoured exposure was the WisdomTree Japan Equities Edged ETF, which was listed on the US market and hedged back to US dollars, Mr Timms said.

Gold could be viewed as insurance against both inflationary and deflationary market outcomes. A small allocation to gold was appropriate as a means of increasing portfolio diversification and as a hedge in times of market volatility.

Gold prices were notoriously difficult to forecast. However, it was possible to build a tactical case for buying gold at current levels. Gold was likely to continue rising in the wake of the Brexit vote and question marks over the euro zone and European banking sector, he said.

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