Rising global policy uncertainty should lead to lower equity multiples.
There is no doubt that policy uncertainty in Europe has risen since last week’s U.K. referendum. The Global Policy Uncertainty Index, created by Baker, Bloom and Davis, is almost certainly much higher today than its last datapoint in May 2016 shown in the chart above.
The uncertainty originating from the U.K.’s “leave” vote will only reinforce weaker global growth and likely trigger a de-rating in global equities. Over the past 12 months the U.S. equity market has repeatedly failed to break above its May 2015 highs. Such market action could be a sign of major top. Meanwhile, global ex-U.S. share prices have been in a bear market for about a year and seem to be breaking down anew.
Bottom Line: Risks to global share prices are building. Investors should stay defensive.