Buy the Brexit Dip as Punchbowl Stays Full - UBS
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UBS equity strategist Julian Emanuel is recommending U.S. investors buy the dip amid the blood in the Street following the surprise vote in favor of Brexit.
Emanuel said while the vote was surprising, it was not shocking. Prior to the recent risk rally, US equities essentially priced in a more conservative outcome – evidenced by the sharp rise in volatility as polls began to hint towards a greater likelihood of 'Brexit'. He also notes potential investor over-hedging and a watchful eye on event risk has also propped the markets, and the unwind of these protective strategies is likely to cushion the downside for US equity markets.
Emanuel expects earnings and the economy keep the bull market intact.
"While yesterday's 'Leave' vote may weigh on sentiment in the near term, it is unlikely to result in a change in the fundamental outlook for US equities," he said. "US corporate earnings growth, which appears to have bottomed in Q1, is expected to rise into the second half of the year as margins remain elevated and the US economic environment continues to improve. Furthermore, relative to other DM markets, an economic slowdown in the UK has limited first-order effects on US equities given the fact that only 2.9% of S&P 500 revenues are sourced from the UK."
He also said the punchbowl stays full while politics packs a punch.
"The passage of Brexit ushers in an at least temporary period of heightened global financial market and economic uncertainty and a prospectively stronger dollar, which will influence the Fed's rate-setting policy," he said. "While the Fed will likely reiterate confidence in a continued US economic recovery, UBS Chief US Economist Maury Harris expects the FOMC will need time to assess the evolving economic and financial market consequences before making further adjustments in the Fed funds rate, resulting in only one 25 bps hike for the remainder of 2016 (vs. two previously). A slower pace of Fed rate hikes likely prolongs the late stages of the current bull market – on average, such bull markets have historically continued for 24 months and moved 33% higher from the date of the initial Fed rate hike."
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