Usually the events that move markets most are those that catch us all by surprise, and although the U.K. referendum vote yesterday was well publicized, very few thought there was a legitimate chance of the ‘Leave’ campaign winning (ourselves included). Yet we now live in a global marketplace and these events cannot be ignored even if one believes there will be a limited impact here at home. A country has never left the European trading block, which will now lead to a whole new round of speculation on when and how this transition will be accomplished.
At this time, we do not envision this event as a buying opportunity. The principal reason is not that we believe there will be dire economic consequences of a 'Brexit' from the European Union, rather the speculation and uncertainty is now likely to escalate from current levels until more clarity regarding the transition has been communicated. It's true that nothing changes overnight for the U.K. and they still have perhaps two years for which they will remain in the European Union. Hence we are confident that this will allow them time to craft a reasonable plan to execute their departure. In the short-term (2-4 months), however, we face the risk that no formal plan will be communicated publicly and thereby the markets will remain nervous and potentially over-react.
As a result, we view this event as new information and expect to make modest adjustments to client portfolios to reflect a more cautious outlook in the near term. Further reductions to equities with direct exposure to the 'Brexit' outcome appears prudent, while increasing our exposure to income producing assets such as real estate and bonds may be wise.
Finally, just to reiterate our thoughts, we believe the U.K. vote to leave the European Union is likely to cause further short-term market volatility and we are preparing for potentially a rough couple of months ahead. But as we get closer toward the end of 2016 and move into next year, we believe this issue will have moved off the front page news and we again will be in a more stable and positive market environment only to look back with a sigh of relief.
If you have any questions or concerns, please do not hesitate to reach out so that we can get in touch.