As investors we must accept there will be periods where our fortitude will be challenged and fear and uncertainty will take hold of the markets. It has been prudent in these situations to maintain a well diversified portfolio that focuses on underlying fundamentals and objectives. The United Kingdom’s decision to leave the European Union has certainly caused a great deal of uncertainty and fear in the market today. At opening bell for US markets the ACWI was down over 5% and the Euro and the pound sharply weakened. Selling in foreign markets has been intense. Investors searching for safe havens have pushed the 10-year US note under 1.6%, briefly touching 1.41% overnight. It’s likely volatility and uncertainty will persist in the near-term as the market digests the UK’s decision to leave the EU and the political turnover later this year.
We believe the greatest risk for the UK over the next few quarters is delayed consumption and investment due to the uncertainty of the path forward. It is therefore essential that the UK move as quickly as possible to limit headwinds to the economy. We do not foresee a permanent impairment and if anything we think recent volatility will likely create opportunities for our long-term focused investors. Our fundamental view of the UK has been positive for some time given a healthy consumer, strong local employment with wage growth, and the globally competitive nature of UK companies. We do, however, recognize that this could hurt growth and valuations on a short-term basis and we will closely watch for knock on effects to other regions.
There will be much to learn about the UK and EU over the next few quarters. Elections in the coming months in Spain, Netherlands, and Italy will indirectly serve as referendums on continued EU membership for those countries as well, given that popular candidates in all of those elections are running on strong anti-immigrant, anti-EU platforms.
As always, we will closely watch market and economic fundamentals as this develops to determine if any action is needed. Our current view is that the UK’s departure from the EU will be a short-term headwind, but does not require action at this time. The UK has been one of the strongest G7 economies and Europe has been on an encouraging recovery path for some time. Our modest allocation to UK companies combined with high quality active management makes us comfortable with our current exposure. Going forward we will follow the same investment process that has helped weather past storms based on a rigorous evaluation of fundamentals, a balanced approach that emphasizes diversification, and selection of best in class managers to navigate security selection. It’s always important in periods like this to be open to moving in any direction but continue to make decisions based on solid data and not speculation. We will closely watch how this effects the UK and EU and act accordingly based on our findings. In the meantime, we want to thank you for your trust and support and if any further communication is needed contact us at your earliest convenience.
Written in collaboration by:
Ben Valore-Caplan, CEO
Akasha Absher, Chief Consulting Officer
Mike Duffy, CFA®, Chief Investment Officer
Alex, Haun, CFA®, Senior Analyst