Regarding the Brexit Referendum

Ron Albahary, CFA, Chief Investment Officer

The people of the United Kingdom (UK) have cast their votes in a national referendum (universally called "Brexit") on European Union (EU) membership and, by a simple majority, have decided to leave. The movement to leave a consortium of European states is not new for the UK. It started almost immediately after they joined the precursor to the EU, the European Economic Community (EEC), in 1973. Fortunately, our generally risk sensitive positioning should help mitigate the impact of the global equity sell-off on portfolios. With that said, the decline in risk assets should affect most portfolios.

The ramifications to the global economy of this unprecedented change in the complexion of the EU are unknown at this time. While the UK economy is not a major contributor to global GDP, the derivative second and third order effects (i.e. unintended consequences) will only be known over time. What we do know is the consensus opinion that Brexit would not happen was wrong and I firmly believe it is due to the severe underestimation of the prevalence and strength of the populist and isolationist movements sweeping the developed world. As such, we believe the potential for an aggravated risk cascade is higher today than it was yesterday, starting with questions about the future of the Eurozone, the Euro currency, and, as a result, the ability of the region and its individual countries to manage a successful path forward burdened by high unemployment, sluggish economies and a massive debt overhang. At a minimum, our regime-based theme of elevated volatility will come back into focus after a brief hiatus since mid-February.

While the effects will play out over time and this could be the beginning of significant drawdown or even a bear market, this event, unexpected by most investors, is a catalyst for us to look for opportunities to take advantage of a sell-off to add to risk asset exposures, marginally and where appropriate, based on client objectives, risk tolerance, and liquidity requirements. Where portfolios have accumulated much cash, there is a substantial underweight to target or there has been a plan in place to "dollar cost average" into a targeted risk exposure, this decision to be opportunistic may happen sooner rather than later.

With that said, we must and will be patient and prudent. It may take years for the UK to work out extrication and renegotiation. We will update you as the data points/insights come in over the next few days, weeks and months.

In conclusion, I offer you the following. This is a wake-up call for investors and politicians that the populist concerns are real and they should be taken seriously. As such, this development may (just may) ultimately drive positive change in the paralyzed and ineffective community of incumbent policy makers across the globe to take structural actions designed to address economic and social issues plaguing their countries as opposed to focusing on self-preservation (i.e. staying elected). We shall see.

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