The UK has woken up as a divided country. While 52% of the voters prefer to leave the European Union, 48% wanted to stay. At first glance, it looks like some important patterns are visible. London, Scotland and Northern Ireland wanted to stay. Wales and the North of England wanted to leave. Millennials wanted to stay. The older generation wanted to leave.1
While this vote does not change the challenges our world is facing in its evolution, it does create a lot of short-term uncertainty. Economic growth could be negatively impacted, yields may go lower, central banks will probably keep rates low for longer and continue their accommodative policies for the foreseeable future. We might also expect equity markets to fall substantially, the British pound and euro to lose value against the US dollar, Japanese yen and Suisse franc and corporate and periphery bonds to underperform if the market goes into a risk-off mode.2 Also, within equities, it's possible that financials and consumer discretionary could underperform and healthcare, energy and consumer staples could outperform the overall market.
Living with political risk
Political uncertainty may weigh on markets for the next few weeks, not helped by the upcoming U.S. elections and the call from some polity for similar referenda in France and the Netherlands. In this context, I think it remains important to focus on structural growth trends. In the short-term, political risk is likely to add volatility, which may give long-term investors an opportunity to add to highest conviction themes and stocks at lower valuation levels.
Divorce could be long, drawn-out process
Even if Brexit does not affect these long-term global challenges, it still might further increase market volatility for some time. For instance, the "divorce" may take at least two years. Political uncertainty (with potential contagion risks to other countries) may weigh on global economic growth. In this context, however, I suspect the central banks will be working to smooth financial markets and in doing so will attempt to inject liquidity, lower their short-term interest rates and increase their debt purchasing programs. As a result, I suspect long-term interest rates should remain low over the long term. Also, Japanese and American long-term rates may be the first to benefit from the results of the Brexit referendum.
Additional information on current market trends is available at durableportfolios.com
1 Source: Burn-Murdoch, John. Brexit: voter turnout by age. blogs.ft.com. June 24, 2016.
2 The term "risk-off mode" refers to an investment setting in which investors attempt to reduce risk by selling what they view to be higher-risk positions while moving into what they view to be low-risk positions.
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This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.
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