Brexit Client Letter: Britain Decides to Leave the EU - Now What?
The global capital markets were caught flat-footed by British voters’ decision to leave the European Union last Thursday. As we all know, markets don’t like surprises, and this one was a doozy.
The implications for investors
As we look forward, the implications of this decision are hard to predict (and we wouldn’t even try!) The political and economic landscape in the UK and the rest of Europe will alter dramatically over the coming days and weeks. The long process of negotiating an exit and subsequent international relations begins almost immediately but no one can be sure of the timetable or outcome.
Contagion into the rest of the EU?
On Sunday, the Spanish general election provided some further indications of the broader anti-EU voice. It is likely last Thursday’s result will increase calls for referendums in other EU states, including Denmark, Sweden and the Netherlands. To a large extent, the UK’s experience in negotiating an exit over coming months will continue to shape the future of the EU for some time.
The impact on global financial markets
At this point in time, the knee-jerk sell-off in risk assets and the flight to safer investments is an understandable reaction, especially after markets rose over the last week as investors priced in a ‘Remain’ vote. Over recent years, financial markets have been driven by the expectations and reality of monetary policy, and today’s result will no doubt delay the path of monetary policy tightening in the US and the continuation of a more accommodative stance in the UK and Europe.
However, we should not over-read the impact of this event on global market volatility. Our global market outlook for 2016 has been dominated by expectations of heightened market volatility, triggered by events such as this. However, with the UK representing about 4% of global Gross Domestic Product (GDP), its ability to cause a major economic shock is limited.
The uncertainty presents risks but also opportunities
In an environment which exhibits heightened volatility and where there is no clear direction for markets generally, we continue to believe in a dynamic approach, reacting to market events to “sell the rallies” or where appropriate “buy the dips”. Identifying the signals in the noise is a challenge requiring a disciplined approach. After a multi-year bull market for equities, the recent environment has been one where risk management has been, and will continue to be, paramount in protecting returns. Across global portfolios, this is achieved through diversification, particularly away from pure equity risk and through the use of multiple asset classes to structure a more attractive risk/reward payoff. So, if you didn’t know why we have a hefty dose of bonds (which soared on Friday) in our balanced portfolios, well, now you know.
Over the coming days, weeks and months, the ramifications of the UK’s decision will continue to be felt both domestically and internationally. The resultant market disruption comes as no surprise and we continue to identify ways to both protect against risks but importantly look for potential opportunities to add value where market reactions are out of line with our fundamental expectations.
We will have a more detailed update to our investment thesis in our Q2 Client Letter soon. In the meantime, feel free to contact us regarding your personal situation.
As always, we appreciate your continued trust and confidence.
Regards,
Ron Sanders