Aegon Asset Management has said Dutch pension funds would do well to leave their interest hedges in place in case the UK decides to exit the EU in next week’s referendum, scheduled for 23 June.
Speaking at the annual conference of Pensioen Pro, IPE’s sister publication in the Netherlands, Hendrik Tuch, head of government bonds and money market funds, warned, however, that “reducing the interest hedge [will also] require them to increase their financial buffers”.
Tuch said pension funds should be able to weather the effects of a Brexit over the long term and that they could counter the effects of potentially lower interest rates resulting from a Brexit by increasing their allocations to equities and credit.
He added that Aegon had reduced positions in peripheral economies, as well as UK credit, on signs the chances of a Brexit were increasing.
He predicted markets would be volatile for at least two years if the UK had to negotiate a new relationship with the EU.
“Investors will flee into the safe haven of German bunds,” he added, “which will see interest rates to fall below zero.”
Tuch said Aegon had seen signs of “panic” setting in in recent days, with investors cutting risk and dumping peripheral bonds, equities and sterling.
In the event of a Brexit decision, Tuch predicted a highly volatile market on Thursday (23 June), followed by a “big bang” on Friday, with equity markets falling by 5-10% and bond yields continuing to drop.
He said he also expected the European Central Bank to announce additional measures, with the effects – including widening spreads – becoming evident as soon as the following Monday (27 June).
Tuch, however, said he was not yet worried by the possibility of Donald Trump’s becoming the next US president, as the controversial candidate had said “such weird things that the Republicans will advise people not to vote for him”.
Also speaking at the Pensioen Pro conference, Diliana Deltcheva, head of emerging market debt at Candriam, said no country would be immune from the effects of a Brexit.
Just how the emerging markets view the risks, however, remains unclear, she said, adding that she could not see a clear link between the UK and, for example, China.