Darrell Bryant Retirement Blog

Friday, June 24, 2016

Important Market Update // Brexit

By Darrell Bryant

Published by Formula Folios June 24, 2016

As many of you may have seen or heard in the news this morning, the Brexit votes have been counted and the U.K. has decided to leave the European Union (EU). This major global development caused many markets to sharply decline Friday morning. As of this writing the NIKKEI in Japan finished the trading day down almost -8%, the FTSE 250 in London is down -7% mid-day, and the S&P 500 in the U.S. opened down -2.68%. The initial market reaction is negative and severe, but where does this leave the global economy and how are our portfolios positioned to protect our clients’ assets during these volatile and uncertain times?

 

Global Economic Impact

The decision for the U.K. to leave the EU raises some significant global economic concerns. It is expected that U.K. companies will see lower capital outflows due to increasing political tensions as well as increasing uncertainty surrounding the country. This would lead to a rise in unemployment and lower GDP in the world’s fifth-largest economy. Though this may be bad news for the U.K. directly, the primary fear is that this could spill over into the rest of Europe which could cause a slowdown on a more global scale. So what can we expect from the markets in the coming months?

 

  • As with most major events that add uncertainty to the global economy, equity markets are expected to decline in the near term as there is added downward pressure and volatility. This could persist until there is more clarity about the overall impact of the Brexit.
  • Bond yields in general are expected to remain suppressed in the near term. Money will likely flow from riskier assets (equities) to less risky assets (bonds, gold, etc.) until there is more clarity on the impact of the Brexit. As demand for bonds increases yields shift lower, thus raising bond prices.

 

Our Portfolios

The Brexit is a prime example of why it is important to hold a smart, diversified portfolio. Although major equity markets are severely down immediately following the decision for the U.K. to leave the EU, we believe we are well positioned in our portfolios for minimal downside exposure:

 

  • Tactical Growth has a 40% exposure to gold, which is currently up over 5%
  • Flexible Growth is fully invested in U.S. Treasury ETF’s, which are up between .25% – 2.5% (depending on the length of maturity) due to the sharp decline in interest rates
  • FFI US Equity (FFILX) has the potential to hold 50 individual stocks but is only 62% invested, therefore reducing overall equity exposure
  • BCA is only 50% invested in high yield bonds at the moment

 

By keeping a non-biased, emotion-free, and consistent investment philosophy we believe our portfolios are well positioned for long term success regardless of the short-term market conditions.

 

Derek Prusa
Senior Market Analysis