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Equity Perspectives

The United Kingdom’s decision to leave the European Union may be a game changer, but top-performing companies in select industries should continue to generate growth.

As investors scrambled for insights into long-term implications of last week’s “Brexit” vote, Lord Abbett’s small-cap growth investing team took the following view: 

  • Global economic growth likely will be lower now, though still positive.
  • We believe that this current “muddle-through” U.S. economy remains a positive for high-growth companies with strong secular growth characteristics.
  • Interest rates likely will remain lower for longer than originally anticipated, and we expect that central banks will continue to provide liquidity, cushioning the impact on equity markets.
  • Uncertainty and volatility have increased considerably, and, therefore, we would not be surprised to see equities churn in the shorter term.
  • We expect that high-growth stocks will resume market leadership, particularly U.S.-focused companies, which is a view we held prior to the Brexit vote. Underlying earnings are reasonably solid, and we have not seen a significant sell-off in growth stocks, aside from companies that are more exposed to Europe. The vast majority is in companies that generate the bulk of their revenues and profits in the United States.

Reaction to the Brexit Outcome
Lord Abbett’s equity risk management team has been running scenario analyses this year, considering the impact of “No Brexit,” “Brexit,” and “Disorderly Brexit” on all of our investment products. Based on the findings of our analysis, and the market reaction we have witnessed thus far, at this stage we do not believe the current scenario is a “Disorderly Brexit.” We have been communicating regularly with the equity risk management team regarding the likelihood of Brexit, and the potential impact, and the market reaction has not been surprising.

We would expect central banks around the world to cut interest rates further, and stand ready to enact a coordinated effort to calm markets, should it be required. We also expect that the timeline for U.S. interest-rate hikes will be extended.

Our biggest concern at this juncture is the potential for a trade war if protectionism spreads as a result of the Brexit vote, which could precipitate a bear market and cause us to move to a more defensive positioning. However, we do not expect this outcome at the current time.

We are confident that segments of the U.S. economy that are in the midst of secular bull markets—such as e-commerce, biotechnology, and cloud software—will lead global equity returns for the next decade. 

At times like this, when sharp dislocations cause panic selling, it is fair to say that active managers have found that attractive buying opportunities can arise, which underscores the need to remain vigilant in seeking out transformative high-growth companies that become oversold due to short-term risk aversion.

 

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