Thursday, April 14, 2016
BREXIT is the trade of the year
The BREXIT issue may be the trade of the year. What does that mean and why give it this view?
1. This is a big event - Not only will this have huge impact on Great Britain and its place in the European and world economy, there will have a spill-over effect to the rest of the EU. This is the type of event that will shift rare event expectations and increase tail risks.
2. There is a specific date when uncertainty will be resolved. There is not an issue of when it will occur. We know the vote date.
3. The probability of the vote can be tracked and measured. Handicappers now say there is a 24% chance of an exit. The poll numbers look like it is very close. The risks of a bad outcome after June are still not clear, but the vote can be watched and given precision.
4. The market has already spoken that this is a big deal and talk is generating more interest. The IMF just stated that there will be severe global damage if the Brits leave.
5. Financial institutions will have to square their risk books so there will be a liquidity effect and there will be a risk premium for those that hold these risky assets. This has started and will continue as we get closer to June. There will be a flight to quality effect regardless of the vote outcome.
There may be better trades that develop through the year and ex post we find had a large pay-off, but this is the most measurable big event trade of the year.