On Thursday June 23, 2016 the United Kingdom (U.K.) voted to leave the European Union (EU). The final vote tally was 52% for leaving (Britain exiting the EU…BREXIT) to 48% for remaining. As I monitored the vote through the night and watched the extreme moves in the currency and financial markets, it became apparent that the consensus belief going into the vote (that the remaining camp would prevail) was incorrect. I say consensus because the polling data and the betting lines were both indicating that the British people would choose to remain in the EU. This belief could be seen in the global financial markets, as they rallied significantly the day of the vote. Thus many global investors found themselves mis-positioned for a BREXIT win.
So what are the implications of this vote?
While the potential implications of BREXIT are vast and deep, the most feared outcome is that it will ultimately lead to a breakup of the EU. The BREXIT vote was largely a reflection of the populist wave sweeping through many developed nations of the world. As economies stagnate and immigration pressures intensify, Europeans are becoming increasingly resentful of establishment elites in Brussels (where the official offices of the EU are located) telling them what they can and cannot do. This has resulted in the increasing popularity of the far right and far left parties in France, Spain, Germany and Italy, who decry the loss of sovereignty. As these nationalistic tendencies rise, it is feared the other nations will choose to follow the path of Britain and leave, thereby collapsing the EU. Time will tell if these fears will be realized.
And how will it affect your portfolio?
There are some things we can be fairly confident of from here. The BREXIT vote definitely increases global uncertainty as investors wrestle with questions like…Will the EU survive? Will the British economy be thrown into recession? Will global growth slow from here? Expect financial market volatility to increase. The political and financial ramifications of BREXIT will be felt for weeks, months, and potentially years. Expect governments and central banks to be very aggressive in their efforts to support and backstop financial markets. On the margin, this vote will likely lead to an even more dovish policy stance from the Bank of England, European Central Bank, Bank of Japan and the U.S. Federal Reserve. Expect U.S. interest rates to remain lower for a longer period of time as foreign investors continue to seek safety and income in U.S. Treasuries. And expect certain non-correlated assets, such as precious metals, to gain more attention as investors seek to hedge their portfolios from increasing uncertainty.
The best approach to dealing with BREXIT is the same approach we always advocate. Build a truly diversified portfolio using multiple asset classes and stay focused on the long-term. Keep funds that will be withdrawn from your portfolio in the next 2 years in safe short-term cash management funds. This will prevent you from being a forced seller in a down market. Finally, don’t fall into the temptation to trade on every scary headline. A disciplined long-term plan tailored to your unique situation is always the best approach no matter what may come.