Yesterday, a referendum was held in the U.K. to determine if the U.K. would exit the European Union, known as the “Brexit” vote. Despite advance polls indicating that the likely outcome would be for the U.K. to remain, the surprising result was a 52% majority in favour of leaving. This has already had a profound negative impact on global equity markets and is expected to carry over into North America when markets open later this morning.
The economic implications of this event are certainly not good for the U.K, or Europe in general, but more importantly for equity markets, it introduces a new element of uncertainty as there is no precedent for an event of this nature and magnitude. In times of uncertainty, investors tend to flock to the safety of government bonds, gold, and the U.S. dollar, and this is what is playing out so far today. In addition to equity markets declining, the British Pound and Euro will be pressured, and oil and other commodities may also fall.
Most Justwealth clients have exposure to equity ETFs, and some in particular will have a small exposure to the iShares Core MSCI EAFE IMI ETF, (ticker symbol XFH) which has some exposure to the U.K.
While the news is certainly not positive, it is worth noting some of the precautions we have taken in our client portfolios:
- Compared to most other companies, we have very limited exposure to Europe and the U.K. in our client portfolios.
- We have selected ETFs that hedge currency exposure in European countries so while the ETFs will decline with the equity markets, the ETFs will not feel the impact of declining European currencies
- ETFs used in client accounts for U.S. markets are NOT hedged, meaning that while again these ETFs will decline with U.S. equity markets, the ETFs will benefit from the impact of a rising U.S. dollar
- Most clients have exposure to Bond ETFs, which should do well today, proving why diversification is important. Note that higher risk bonds such as high yield or corporate bonds may not perform as well today
Today could very well be the worst equity market day for 2016, but we do not expect that this will turn into the Great Recession that we saw 8 or 9 years ago. Equity markets could rebound quickly, or they could fall further in the short run – we don’t know and nobody else does either! What is predictable however, is that short-term declines become irrelevant in the long term. We are happy to chat with our clients at any time regarding market events or our investment views.
Written by James Gauthier, Chief Investment Officer at Justwealth