While the second quarter of 2016 saw a continued rebound from the drop in the markets we experienced in the first quarter, the dominating story of the quarter was the UK referendum vote: Brexit. Time will tell if it portends to greater instability within the European Union (EU). In the meantime, there are very real reverberations that are being felt on both sides of the Atlantic — positive and negative.
Perhaps the second biggest story of the quarter has been the rebound in commodity prices led by natural gas. On the opposite side, financials continue to see their margins being eroded through continued low interest rates — with the Brexit vote adding to that pressure — while spurring higher yielding sectors such as real estate and utilities.
Using AlphaSense, we identified a number of key themes in the second quarter and compared their keyword count versus the same period last year. All of the themes we looked at had substantially more activity around them compared to last year. However, it was the effect of the UK referendum vote late in the quarter and its effect on UK real estate — including the hotel / lodging industry — that really took the crown. (As of this writing, six UK real estate mutual funds have frozen redemptions due to the overwhelming number of withdrawal requests. We commented on this in a previous post.)
The trouble with the European banks have been known for some time. The ripple effect from Brexit suggests that information on both the Italian prime minster, Matteo Renzeri, and the Italian banking industry, has compounded significantly, exemplifying the situation’s influence on the global markets.
Given the significant dispersion among the various sectors in the second quarter, it will be interesting to see how the investment management community reacts to this potential new world order, and if alpha opportunities present themselves given the new, socio-economic paradigms being played out across Europe — not to mention our own political fracases.