Principal Dials Back Risk as Brexit Seen as First Domino to Fall

  • Economic and political landscapes are fragile, Carson says
  • Emerging markets will be more directly affected than U.S.

Principal Financial Group Inc.’s asset manager is scaling back from risks in the bond market on the prospect that the U.K. vote to leave the European Union signals more turmoil ahead.

“The Brexit vote is only the first domino to fall in a chain of events that could take days, weeks, months, and even years to unfold,” Byron Carson, portfolio manager at Principal Global Fixed Income, said in a blog post dated Wednesday.

With markets rebounding in recent days, investment managers are assessing whether last week’s events marked the beginning of a more volatile era in global politics and markets. David Rubenstein, co-founder of Carlyle Group LP, said Wednesday that the U.K. vote was no calamity and that Britain’s leaders may “come to their senses” and decide not to exit the EU. George Soros, the money manager who broke the Bank of England in 1992, told the European Parliament that the referendum has unleashed a crisis in financial markets.

Principal Global Fixed Income, which oversees more than $90 billion, is prepared for increased market volatility, currency fluctuations and the possibility of reduced international commerce, Carson said. The company adjusted an internal metric to reflect a “macro environment that is less conducive to risk taking.”

For instance, there is less reason to believe that corporate bonds will outperform Treasuries over the next three to six months, he wrote. While the dislocation may eventually provide opportunity for investors, now is the time to demand more compensation for taking risks, he said.

“Fragile political, economic, and monetary landscapes will add fuel to the fire as the world looks at a changed and potentially constrained global trade environment,” Carson said. While U.S. markets may benefit as international investors seek a dependable haven, “emerging markets will be more directly affected as global trade evolves.”

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