BREXIT — What happened last night?

2016-06-24

The UK Referendum delivered a surprise to global markets and voted to leave the European Union. This could take a couple of years to materialize and many debates will happen prior.

Immediate Impacts

  • The uncertainty of how things will play out will cause volatile markets in the short and mid-term
  • The USD is up today against most global currencies as a safe haven currency
  • Gold is higher
  • Bond yields are lower
  • Very small chance of FED rate hike in 2016
  • US stocks are mostly insulated
  • Heightened risk of contagion in Europe – i.e. other countries may consider leaving

Strategy

The Key is not to panic; headlines will sound scary over the next couple of days. We will continue to focus on quality, long term names and themes.

More than ever it’s important to use a balanced approach. As we’ve reviewed together recently, we have set aside a portion of your investments which are completely isolated in case you would need cash for short or mid-term needs and allow the rest of the portfolio to resume its long term growth

Specific companies will be impacted, who have a direct relationship and dependence on the UK (i.e. Financial services), but these companies are few and far between in our portfolios.

Earnings of large corporations will mainly be intact as opposed to 2008. And there is no issue in the stability of our dividend payers.

We are not looking to sell into cash, we already had higher cash positions in light of the upcoming uncertainty.

We are currently looking for opportunities to buy high quality names, specifically in Consumer staples and Pharma.

We recognize that things may take time to stabilize, and as discussed often, any equity strategy should have a 3 to 5 year time frame minimum.

CDN Equity Market

  • Most Canadian banks have hedged their currency positions last night, and have no systematic shock risk
  • Energy: favorable supply -demand situation continues
  • Materials: Gold is rallying, but may be short lived

US Equities are mostly insulated, earning derived from domestic economy, no major impacts

Things to consider

This is not a black swan event. Some specific sectors/stocks will be affected but not a widespread meltdown like we saw in 2008.

Are companies like NIKE selling less shoes or Starbucks selling less coffee, will MasterCard process less transactions?

Great investors like warren Buffet are not panicking – and he is certainly not selling his stake in coca cola

How does this event affect our current portfolios? We restructured all portfolios to be more adaptable with a focus on risk/change management. So here is a quick preview:

  • CASH/FIXED INCOME (20-40%): Very little impact to this portion, this is where we would draw money from if needed over uncertain and volatile period, with no impact to our long term strategy.
  • GROWTH PORTFOLIO (50%-70%): Stocks are sliding, bonds are winning. Long term: good companies with strong management will take advantage of this opportunity (change = opportunity) to bring value to shareholders and stakeholders. Cash present within our portfolio will be deployed to take advantage of the market price discount.
  • ALTERNATIVE (20%): Limited or no effect as the view of this portion of the portfolio is that equity markets will stay flat with volatility for an extended period of time.
  • CURRENCY: Even though some of our positions were hedged back to Canadian dollar, a large portion of our holdings still is unhedged, especially to the USD. As such it will provide a further buffer to the short-term volatility.

We spoke on many occasions about volatility and the difference between volatility and risk. Risk is permanently losing your capital (ex: providing a loan to friend, or speculating on a stock). Volatility is the entry price to pay for a long-term better rate of return for your portfolio. We said many times to expect higher volatility in ALL asset classes. We were prepared; and we continue managing your money with only one goal in mind: Helping you reach your financial objectives by managing both the risk of your individual circumstances and volatility of financial markets in accordance with your individual risk profiles and financial objectives.

Enjoy the St-Jean week-end (it may also become a very festive day in the UK in the coming years).

Please feel free to call or email me if you would like to discuss further.