Brexit

What a wild  ride on Thursday. It was an unexpected outcome for most political pundits and investment experts. Not until the afternoon that day did tallied results begin to swing in the favor of leave. No many could envision the nerve it would take to actually leave the EU. Global markets reacted dramatically to the additional uncertainty.

This change will have lasting effects in the UK, EU and globally. It represents the first departure since WWII in a trend towards unity, peace, and globalization. The recent success of populist politics is not just isolated to the US.

The good news is that most feel this is not a Lehman moment wherein the contamination results in a severe global draw down. Before we explore some of these issues and their ramifications, let’s focus on how KilterHowling portfolios did in the upheaval on Friday the first trading day after Brexit:

Just on Friday, the global stock index, the ACWI, declined -5.3%. A sample of our KH Global Growth portfolios fell about 1/3 less than that, or about -3.5%. Still a rough result for a single day, but we are pleased with this result. We are very happy to see our portfolios down less than the market on such a trading day. Winning by not losing (as much in this case) is the key to our strategy and comes from the diversification of investment style we speak so much about.

Our Capital Preservation portfolios rose slightly on Friday in line with most bond market moves.

If you are a client of KilterHowling, hopefully you feel you are in a good spot. Remember we are invested right alongside you.  Now let’s explore a few short and long term ramifications of Brexit.

Central Banks / Fiscal Policy Responses:
If there was a trend towards tightening (raising rates) in the US then this will likely be pushed out to future meetings.  Janet Yellen has already said as much.  Other central banks around the world were still in an easing mode so this shouldn’t change.  Unfortunately they don’t have much room to navigate with rates so low across the board.  Speaking with an understated tone, it is very likely not the time for austere fiscal policy.

Economics:
Brexit is very likely a negative for the UK economy.  Their future depends on the success they have renegotiating trade agreements with the EU plus over 60 other countries. Certainly the EU members will be tough negotiators as they will want to prevent further signalling to other EU members.

I was recently on vacation in Europe and indeed arrived back in the US while the Brexit vote was not yet counted.  A little coincidentally I ran into several of my former banking colleagues there. They shared some thoughts on the ground. It is unlikely that London can remain the financial capital of Europe as much of the core business relies on the product ‘passporting’ into the rest of Europe.  If the UK is not longer the gateway to Europe then what are they?  Already financial service firms are making plans to relocate employees elsewhere.

Ironically Brexit may be worse for the EU than for the UK.  The UK has a currency that can devalue and keep them competitive.  But this populist movement resulting in Brexit is the beginning of a new round of EU instability.  Will others EU states make similar decisions?  Indeed several European country’s equity markets were down almost twice as much as the UK on the day.

Politics:
Clearly many don’t feel that the wealth generated from the peace and prosperity of globalization has lifted all boats.  While it surely has lifted many boats, it hasn’t done so equally.  Looking at the regions of the UK where the Remain Vote was cast it was predominantly in London and Scotland.  Less urban areas were more inclined to a Leave Vote.

The politics of the Brexit referendum beg some questions.  Why would the PM of the UK put so much on the line?  Why only require a 50% approval when the consequences are so uncertain and likely to be negative. The Brexit referendum is non-binding and the task of leaving the EU may be too enormous to implement.  The PM has resigned and whoever takes his place must now be the one to implement Article 50 of the EU Treaties to begin the leaving process.  Good luck to the incoming PM.

We at KilterHowling will of course be following events in the UK closely but it hasn’t changed how we manage our portfolios. It is difficult to have an investment plan for specific economic or political events.  They are simply too difficult to predict and therefore too costly to hedge.  But one can have an investment plan that is expected to work through periods of heightened volatility no matter the source of that risk. That is certainly our approach.

All the best!
– Will and Kreighton