The UK has voted to exit the European Union. Global markets are down, and the US markets are likely to open weaker too.


Today’s market activity reflects investors’ immediate surprise about the outcome. Most recent polls showed a slight tilt toward “Remain.” Our own view was that, within standard polling margin for error, it was way too close to call either way. So investors arguably got ahead of themselves over the past week.

It’s no surprise that on today’s news, investors are rushing to “defensive” investments like US Treasuries, the German Bund, gold, and the Japanese Yen. Equities are being sold out of concern about economic growth and political uncertainty. We note that this has been happening in various forms (recall January earlier this year) for the past 18 months, as investors fear recession.

In the near term, Brexit should add incremental challenges to already anemic economic growth in Europe. It puts existing laws supporting commerce in the region “on hold.” More importantly, it puts a greater burden on the strongest member nations (including Germany and France) to subsidize the EU collective engine, since the UK also helped in that role. Also, Brexit may encourage other countries to consider a vote, further weakening the EU concept. We continue to believe the EU will need to redefine itself over the next few years, but ultimately can strengthen its political and economic systems for remaning members.

Importantly, across most markets, this fear of weakening economic growth has already been reflected in investment prices to a significant extent.


From an investment standpoint, we have already been positioning portfolios to take advantage of events such as these, for the past 18 months. Many stocks in the US, Europe and other regions already priced for a slowdown. So we don’t expect to be doing anything materially different on today’s news alone, either from an “offensive” or “defensive” perspective.

Stocks considered to be defensive (utilities, health care, staple services) are already trading near or at all-time highs, while those tied to economic growth (industrials, banks, commodity producers, many consumer services, both in the US and Europe) have already been hit very hard. We believe this latter group is where the long term opportunity is for returns, because they are on sale. They depend on economic growth, which right now is scarce.

To position the “risk-seeking” portion of the portfolio for long term success, we have to buy those stocks that are on sale today, even if that means they have a tough year ahead. In so doing, we strive to be mindful of balance sheet risk.

In the meantime, from a defensive standpoint, we have already made allocations to fixed income to strive to match client goals and time-frames. The purpose is to help insulate client portfolios during challenging periods like today. “Defensive” stocks (but not the popular/expensive ones) play a supporting role in our client portfolios as well, for diversification.

Any questions as Brexit unfolds, please give us a call.