Brexit fears spurring traders to buy volatility, trim stocks

Bloomberg

The pound tumbled and currency volatility surged on Monday after two polls showed more Britons favor a vote to leave the European Union at a June 23 referendum than those who want to stay. That prompted a money manager 10,500 miles away in Sydney to buy stock-market protection, while a brokerage in Bangkok is advising clients to trim equities and hold extra cash.
“I don’t want to sound scary, but the market isn’t prepared for this,” said Nader Naeimi at AMP Capital Investors Ltd. in Sydney, a company that oversees more than $110 billion. He’s been buying futures contracts on European and U.S. equity volatility, even as he forecasts voters will choose to stay in the EU. “It makes sense to buy some protection. Fear, worry and volatility are likely to intensify as we get closer.”
State Street Global Advisors, which oversees $2 trillion, recommends selling U.K. and European equities. Win Udomrachtavanich, chairman of Ktb Securities Co. in Bangkok, says savers should cut the amount of equities they hold and keep the money in cash. Goldman Sachs Assets Management, which oversees more than $1 trillion, said last week it will be heading into the Brexit vote “with little U.K. risk in portfolios.”
Asian markets fell as much as 0.5 percent on Monday after the poll results, and sterling declined against all 16 major peers. Weaker-than-expected U.S. jobs growth last month also weighed on sentiment, spurring concern the world’s largest economy is struggling.
Still, global fund managers have become even more wary of a market that was already their least favored. Their allocation to the nation’s equities has fallen to the lowest levels since 2008, according to a Bank of America Corp. survey published last month.
A YouGov poll for ITV found 45 percent would choose “Leave” at the June 23 referendum, compared with 41 percent picking “Remain.” A separate survey by TNS showed 43 percent for “Leave” and 41 percent for “Remain.” “I advise clients to take profit on local stocks and hold cash because Britain’s exit from the EU may create turmoil in global equity markets,” said Ktb Securities’ Udomrachtavanich. “Most investors had too much optimism that Britain would continue their stay in the EU. The chance of an exit is rising.”

‘Problem After Problem’
AMP’s Naeimi bought futures on the VStoxx Index, which tracks volatility on the Euro Stoxx 50 Index, as well as on the VIX, as the Chicago Board Options Exchange Volatility Index is known. These trades will be profitable if the volatility gauges climb, which happens when investors ascribe a higher chance of stock swings. His fund, which isn’t limited to any one asset class, has beaten 75 percent of peers over the past five years.
“Our concern is, if the Brexit gets up, it’s going to be basically an ongoing period of problem after problem after problem after problem,” said Mark Wills, the head of the investment solutions group for Asia-Pacific at State Street Global in Sydney. “It’s just going to make Europe on a relative basis uninvestible.”
In Dubai, Hans Goetti is forecasting that if Britons vote to exit the EU the pound may fall more than four percent against the dollar from current levels to a 2009 low. Still, the chief strategist for the Middle East and Asia at Banque Internationale à Luxembourg, which has $42 billion under management, says the repercussions would probably be contained.