BREXIT!
Like most everyone, I went to bed last Thursday night fairly confident that the UK people would vote to stay in the EU. Global markets also closed yesterday with an expectation of a REMAIN vote carrying the day even though the polls were pretty divided. Interestingly, the UK betting houses which have a better track record than the official pollsters at predicting outcomes had been consistently favoring the REMAIN outcome. Well never underestimate the voting public.
I heard at noon last Friday that the 3rd most common Google search in the UK today was “What is the EU”? That is a bit frightening as it is possible that some voted with a sense of Nationalism (and against open borders and immigration) and not with a full understanding of the consequences of a BREXIT. To be fair, nobody has a full understanding of how this divorce will play out in the coming months and years.
Markets don’t like uncertainty and this rather unexpected outcome has caused more uncertainty. While some are calling this another 2011 moment (remember when Greece held the global markets hostage?) it is important to realize that the UK is only a trading partner with the EU and it rejected joining the single currency like the other 27 members of the EU which posed the real problem of a Greece exit years ago. In many ways, the UK was only partially committed to the EU partnership from the beginning and extricating themselves from it will be hard but not as problematic as a German or Italian defection. While some think that this will open the door to the latter, I don’t think that is the case so the risk of contagion is much less.
So while markets are down on this news it is important to realize that our portfolios have built in “buffers”. Most have a good exposure to the U$ and it is up about 2% today offsetting the market drop. Bonds are up on this development also as the historically low interest rates seem to have no bottom in sight in the current environment. And many portfolios have a weighting in precious metal stocks which are up a great deal this year and last Friday in particular (with Gold up almost 5% today). Utility stocks are also behaving well and of course most portfolios hold cash for opportunities such as this one.
I came into the office early last Friday thinking I would put some of the client cash to work today but after attending an early morning conference call with some of our European strategists at 9am, I have elected to hold back on deploying cash until we see how next week shapes up. These market developments have a tendency to build on the initial reaction especially when the development has caught so many by utter shock. So I am being patient but expect to put money to work in the coming weeks!