U.K. To Leave EU? Analysis of the Brexit Vote
This is the first major market event that has occurred since the merger of SBL and CFM at the beginning of the year. We want all of our clients to know that we are focused on this, and working to ensure that we make correct and considered choices on your behalf.
Impact of the U.K. Vote
The United Kingdom voted to leave the European Union yesterday. Stock markets in the U.S. are down approximately 2% and around the world even more. Interestingly, the U.S. market has fallen only to where it was a week ago and is still higher than it was in late May.
It is not yet clear what the fundamental, longer term implications will be. As long term investors, that is what we will be trying to figure out. Some preliminary thoughts:
- “Brexit” itself likely will not directly impact the U.S. economy in a significant way.
- What are the implications for corporate earnings? That will be a focus of our research, but it will affect some companies more than others and should be seen in that light.
- For the U.K., there is a two year process of actually leaving the EU, so the direct immediate effect should be limited.
- Interest rates are even more likely to stay low now, as are oil prices; and
- The dollar is likely to be strong.
Volatility and Trading
In the near term, traders are being forced to cover positions where they took the wrong bets. Much of the volatility today is due to traders. This is just noise and should be largely ignored. As we look at charts of U.S. stocks, bonds, or the dollar we remain in the same trading range we’ve been in for the last year, only a few percent below the all-time highs.
Foreign markets are another matter and will require re-evaluation. With only a few exceptions, all of our portfolios are already underweight in international market exposure compared to their benchmark indices.
CFM Tactical Portfolio Strategies
A few comments specific to the tactical portfolio strategies managed by CFM. Going into the Brexit vote, CFM’s tactical portfolios were positioned to minimize the impact of an “out” vote. Within the core, long-term portion of our portfolios, we are underweight European and other International Developed Market stocks versus the global stock market. The relatively small amount of core stock allocation that is invested in European stocks is divided between low volatility international stocks, US Dollar hedged international stocks, and large-cap value international stocks. All of these holdings should do well versus the international stock markets during the correction in Europe.
The U.K.’s exit from the European Union is likely first domino in a line of other countries that will follow suit, or consider doing so. The volatility and uncertainty created by yesterday’s election and U.K. voting to leave the EU will create investment opportunities that we will take advantage of, whether it be next week or a year from now. We are researching areas to take advantage of as the dust begins to settle.
Bottom line…it is a time to study, not a time to panic.