Britains exit from the European Union wont take
effect until 2019, but Brexit is already wreaking havoc with
the regions auto industry.
For one carmaker based in Western Europe, every 1 percent
drop in the value of the British pound against the euro costs
the company roughly 30 million ($31.8 million) in cash
flow, says Barclays credit analyst Christophe Boulanger. A
weakening pound has throttled back overall consumer demand for
cars and sport utility vehicles in the United Kingdom by 5
percent. To push product out of the showroom, European
automakers are offering cash incentives that slash listed
prices by 20 percent, almost double the 10.5 percent of U.S.
European carmakers sales are actually doing
well, says Boulanger, Barclays chief credit analyst
covering the manufacturing and general industrial sector.
The problem is that incentives are fairly high, which
puts earnings quality at risk.
Mark Wall, who heads the economics team at Deutsche Bank in
London, says theres no denying that Brexit portends a
period of belt-tightening for an economy thats 65 percent
dependent on consumption and services. People still have
jobs and income, and theyre able to consume, he
says. But households are exposed to rising import prices,
and theyll be experiencing a real-income shock this year
as their discretionary income falls.
Boulanger and Wall are among the top-ranked European credit
analysts on Institutional Investors latest
All-Europe Fixed-Income Research Team whose views clients seek
in order to make sense of a welter of fast-moving events
roiling the regions economies, markets, and political
institutions. (J.P. Morgan leads the pack for a seventh
straight year, with 17 ranked analysts, followed by No. 2 Bank
of America Merrill Lynch and No. 3 Deutsche Bank, which boasts
nine first-team analysts. Barclays and Citi round out the top
Fueled by nationalistic sentiment, not only is Brexit
reshuffling the economic deck in Europe but having
foretold the improbable rise of Donald Trump in the U.S.
the plebiscite could be a harbinger of electoral things to come
on the Continent. Last year was the biggest step backward
in the 60-year history of the European Union, asserts
Elsewhere in Europe, other campaigns have been dominated by
jingoist candidates riding a wave of fear and resentment. In
France, where elections will take place in two tranches
commencing April 23, party leader Marine Le Pen of the National
Front is gaining traction against the Republicans
scandal-plagued François Fillon, the putative
front-runner, with her message of returning to the franc and a
Brexit-like referendum dubbed Frexit. In the Netherlands,
elaborately coiffed Geert Wilders a fiery opponent of
Islam, immigration, and the EU who also wants out of the euro
is leading in the public opinion polls. But in a country
known for its liberalism and tolerance, opposition parties are
refusing to form a governing coalition with Wilders
right-wing Party of Freedom.
The small country of 17 million people is deserving of far
more attention than it is getting, insists Jacqueline Ineke,
head of Morgan Stanleys Zurich-based credit team covering
banking and financial services.
Holland uses the euro, and if it leaves, it breaks up
the EU, says Ineke. The result, she adds, would be
catastrophic: You cant quantify the damage if the
euro zone breaks apart. Amid the turmoil Inekes
team is recommending as safe havens the bonds of Swiss banks
and Irish bank credits as the best periphery play
in the EU.
James Reid, a top-rated high-yield debt strategist at
Deutsche in London, notes that nearly forgotten in the
commotion over Brexit has been the benefit of the quantitative
easing program initiated by the European Central Bank last
year, which purchased 65 billion in nonbank corporate
In equities terms, its been the equivalent of
the Federal Reserve injecting more than $65 billion into the
S&P 500 index, Reid says. He sees the Trump
administrations promised domestic infrastructure spending
in the U.S., proposed corporate tax cuts, and expected
regulatory rollbacks as net positives offsetting protectionist
proposals like import taxes. Add to that further ECB
tapering and higher inflation, he says, and we
think yields are going higher in 2017.
His top sector overweight call this year is for credits of
financials both at the senior level and higher-beta
exposure at the subordinated level. Rising nominal yields and
steepening curves should support the trade. Reid also
sees investment-grade bonds outperforming high-yields this
year, and hes commending short-dated single-Bs for their
attractive yield pickup and lower default risk.
Stephen Dulake, the London-based global head of credit
research at J.P. Morgan, is also touting the credits of
European banks over corporates as the ECB winds down its QE
program. He thinks corporate bonds were the last piece of
the QE puzzle and could very well be the first to be