Your Portfolio and Brexit

Posted by Neil R. McIver, CIM & Ethan Dang, CFA, MBA

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Brexit (or British Exit) is now a reality. Overnight, the UK voted to leave the European Union (EU). Final vote counts were 51.9% for the Leave camp and 48.1% for the Remain camp. Going into the vote, markets were betting on Remain, giving only a 25% chance to Brexit, but were proven wrong by voters. The anti-establishment movement as seen in other parts of the world continues. This unexpected and surprising outcome now creates much more uncertainly for the UK and the European region, although the UK does have two years to renegotiate trade deals.

Brexit is another example of a market tail-risk event, meaning it was a low probability event, but the possibility of such an outcome is real. In reaction, global markets are down this morning, with European markets being hit the hardest. Major European markets were lower by 6%-8%. TSX is off -1.5% and the S&P 500 is down -3%. The Nikkei was down -8%. The British Pound is down -8% against the U.S. Dollar, currently at 1.3621. It could trade down to 1.15-1.20, another 15% lower. We can expect more volatility and potential downside in the short term.

On the other hand, Gold is up 5%. The U.S. Dollar and Yen are rallying as safe haven currencies. The CAD is down -1.3% against the U.S. Dollar, trading at $0.7735.

The chance of a U.S. Fed rate hike has been pushed out as well. Futures predicting a zero chance out until Nov. 2016 and only a 13% chance in December 2016.

Neil’s Thoughts:

  • Short term down draft in equity markets worldwide but inconsequential noise outside of Europe over the mid/long term. It justifies our large underweight in European equities.
  • Positive for Gold which the model portfolios are overweight in.
  • Positive for the U.S. Dollar and to a lesser extent the CAD. This is very good for our models.
  • Positive for North American equities short/mid/longer term. This is very good for our models.
  • Generally negative for European equities.
  • Positive for the Pound Sterling vs the Euro in the long run.
  • May result in a technical recession in Britain in the short term.
  • Highly negative for the Euro as all the uncertainty is now on the Euro (the Pound’s future is known).
  • Credit markets will not like this, but likely this will be short-term noise.
  • Validates Trump politically to certain extent and increases the likelihood of continued anti-establishment political outcomes and a potential Trump victory.

Rest assured that your portfolios are well diversified and positioned to handle this Brexit outcome. Months ago we repositioned all our model portfolios with this risk in mind. This event proves the value of efficient diversification.

We’re always looking out for your best interest.