The Impact of Brexit

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

An overview of highlights from our Investment Team on the impact of Brexit on markets and Brinker Capital portfolios.

Key Highlights:

  • Today is largely a retracement of last week’s market action. Over the last week, the MSCI EAFE Index was up over 7% and the Russell 3000 Index almost 2% as the market anticipated a “remain” vote. We’ve retraced that rally today, but global markets are only marginally down from levels seen a week ago.
  • Brinker Capital portfolios have generally been underweight to international markets, specifically developed international markets.
  • This vote is a political event, not an economic event. It marks the coming end of the UK’s trade agreement with the EU, but the process is one that will likely take years. What it has done immediately is increased the level of uncertainty in markets. We will likely see additional global central bank liquidity and easing in an effort to support economies and markets.
  • Emotional trading can create opportunities, so our focus over the coming weeks and months will be to identify and take advantage of these opportunities.

Brexit’s Impact on Global Economies and Markets

  • The economic and political impact on the UK is decidedly negative, but the degree of which is uncertain. The currency and equity markets will be weaker in the near term while the long-term outlook is unclear given the politics involved.
  • The negative economic impact on Europe is less, but still meaningful. From a political perspective, the departure highlights the rising risk of populism and becomes another distraction for the EU from much-needed reforms. We expect a weaker euro and European risk assets in the near term; the central bank could try to cushion some impact.
  • International markets will experience the indirect effects of lower global growth and general risk aversion.
  • We do not see it as having a significant direct impact on the U.S. economy; however, a strengthening U.S. dollar as a result will be a headwind for U.S. companies with significant international business.
  • Expectations for additional interest rate hikes by the Federal Reserve have plummeted. Today, the futures curve is predicting a zero chance of a rate hike in September (down from 31% yesterday) and a 14% chance in December (down from 50%).

How Brinker Capital is Positioned in Strategic Portfolios

  • Portfolios have been positioned with a meaningful underweight to international equity markets in favor of domestic equity markets.
  • The underweight has been concentrated in developed international markets, due to concerns over long-term structural issues in their economies that have an impact on economic growth.
  • We don’t anticipate any immediate changes to the portfolios as a result of these events as we feel we were well positioned ahead of the news, and we expect to reallocate portfolios in late July.

Overall Summary

  • We think this is an extended process that will develop over the coming months and years. Today, the market is pricing in the uncertainty, but this will be a fluid and evolving process.
  • The market selloff today has been relatively orderly and largely a retracement of the gains of the last week.
  • Our portfolios were well positioned in advance of the vote with an underweight to international markets.
  • We expect the uncertainty to result in higher levels of volatility, which creates opportunities for active management.

Source: Brinker Capital. Views expressed are for informational purposes only. Holdings subject to change. Not all asset classes referenced in this material may be represented in your portfolio. All investments involve risk including loss of principal. Fixed income investments are subject to interest rate and credit risk. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Brinker Capital Inc., a Registered Investment Advisor.

Brexit: June Update

Stuart QuintStuart 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:

  1. A hit to direct trade with the rest of Europe
  2. Another Scottish independence referendum
  3. Job losses among UK multinationals based in the UK

Three potential repercussions for the EU could include:

  1. Another hit to GDP growth from trade disruption with the UK
  2. 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
  3. 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.