Stuart P. Quint, CFA, Senior Investment Manager & International Strategist
- The UK referendum on Brexit to be held June 23 is coming down to the wire.
- While polls are noisy and possibly unreliable like last year, a “Yes” for Brexit would stoke volatility for UK and other markets, particularly in Europe.
- Brinker portfolios have been underweight developed international markets.
Following the March 3, 2016 blog on Brexit, markets have begun to reconsider the odds and implications of a potential departure of the UK from the European Union.
While the base case still appears slightly in favor of the UK remaining in the EU, the event of a “Yes” vote on Brexit could have moderate to sizable negative repercussions on markets. The UK stands to lose the most if it were to depart the EU. However, Europe could also enter another period of volatility as resurfacing doubts about European political cohesion could cloud already tepid economic recovery.
As previously mentioned, three major repercussions for the UK could consist of:
- A hit to direct trade with the rest of Europe
- Another Scottish independence referendum
- Job losses among UK multinationals based in the UK
Three potential repercussions for the EU could include:
- Another hit to GDP growth from trade disruption with the UK
- Magnified perception of European political risk in countries such as France and possibly Spain’s looming repeat of general elections a few days after the Brexit referendum
- Distraction for Europe to working through economic and foreign policy issues
Additionally, Spanish elections (for the second time in 6 months after failure to form a coalition government) will occur a few days after the Brexit referendum. The rise of non-traditional parties could once again keep or enhance chaos in Spanish politics.
A “Yes” vote is likely to keep the Fed on hold from raising interest rates given the uncertain fallout to financial markets and US exports. Even a vote to remain could keep the Fed on hold temporarily.
Brinker Capital portfolios in general have been underweight developed international equities. After having been neutral last year, portfolios reduced exposure in March due to concerns on the limits of loose monetary policy alone to bolster growth without meaningful structural reform. While it is quite possible that Brexit risks fade, this added an additional factor of volatility that motivated the reduction of international developed equities portfolios.
The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.