{"id":3333,"date":"2016-06-30T19:03:36","date_gmt":"2016-06-30T23:03:36","guid":{"rendered":"http:\/\/162.223.13.186\/~zacksim\/4-investment-implications-of-the-brexit\/"},"modified":"2022-02-26T13:22:13","modified_gmt":"2022-02-26T13:22:13","slug":"4-investment-implications-of-the-brexit","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/4-investment-implications-of-the-brexit\/","title":{"rendered":"4 Investment Implications of the \u201cBrexit\u201d"},"content":{"rendered":"<\/p>\n<p>The UK\u2019s decision to leave the European Union (EU) created a myriad of uncertainties about the economic futures of Europe and Britain. I\u2019ve seen many pundits remark that \u2018the market at least has clarity given the vote is over,\u2019 but <em>even that <\/em>is uncertain at this stage. The referendum itself is powerless until Britain invokes Article 50 of the Lisbon Treaty, whereby they formally request to leave the EU. The EU is pressing for this to happen quickly so markets aren\u2019t left waiting in the wings, but it does not appear that Prime Minister David Cameron will be the one to lead the effort; his successor will when that person (still unknown) takes over. It could be weeks, even months before Britain actually starts this process.<\/p>\n<p>You\u2019ve seen me write this before, but <em>markets loathe uncertainty<\/em>, and there is a heap of it in Europe right now. The biggest uncertainties I see are:<\/p>\n<ul>\n<li>To what extent will businesses defer fixed investment and hiring in the region due to uncertainty about exchange rates, regulatory issues, further political fallout and the possibility of new trade barriers?<\/li>\n<\/ul>\n<ul>\n<li>Will UK GDP take a hit and where will it fall as a result? Shallow recession?<\/li>\n<\/ul>\n<ul>\n<li>Will Scotland declare a 2<sup>nd<\/sup> referendum to stay in Britain? (A majority of Scottish voters preferred to remain in the EU.)<\/li>\n<\/ul>\n<p>I am not convinced anti-globalization and anti-trade were the driving issues that led voters over the edge in Britain, especially as immigration and over-regulation from Brussels seemed to be the bigger catalysts. With that, I\u2019m less concerned about other countries leaving the EU, and do not think we\u2019re heading towards a revolutionary wave of anti-globalization and anti-trade.<\/p>\n<p>There is no such thing as certainty in the market, only probabilities: what you believe is either more likely or less likely to occur. And, in my view, the events (as they unfold) in Britain and Europe have actually <em>added <\/em>some clarity on what I think could occur in the market this year. Here is what I believe we\u2019ll see happen:<\/p>\n<p><strong>Low Interest Rates Are Here to Stay \u2013 <\/strong>the Fed\u2019s streak of backing away from commitments to rate increases is nothing short of remarkable. In December 2015, Fed policymakers expected the benchmark fed funds rate to be around 1.375% at the end of 2016 with a median forecast of 2.375% by end of 2017. This rate was actually down significantly from just six months prior, with previous \u201cdot plot\u201d forecasts in June 2015 predicting a 1.625% rate by the end of 2016 and 2.875% by 2017\u2019s close. It is clear to me now that we will get nowhere near those levels in the next two years, and there is scarce chance the Fed will elect to raise rates anytime soon, as the Europe situation plays out.<\/p>\n<p><strong>Money and Capital Should Flow into the US \u2013 <\/strong>I believe money will continue to flow into the U.S. and U.S. dollar denominated assets, which should keep downward pressure on long-term interest rates and provide further support to risk assets, like stocks. Yield-bearing stocks, like the dividend-payers, could perhaps surface as the most attractive in this environment\u2014historically, when dividend stock yields are materially higher than the risk-free rate, stocks do well. That\u2019s what we have today and will likely have for some time.<\/p>\n<p><strong>Major Indices in Europe Could Continue Wobbling \u2013 <\/strong>I actually do not see a huge change to the growth story in Europe and Britain in the medium term. The path forward still looks very uninspiring with flattish growth. I think GDP estimates will have to be revised downward for both areas, however, as the investment component weakens (I do not see a major recession in the wings). As mentioned, the unwinding process could take years, and capital can flow freely in that time just as it does now. The uncertainty behind regulatory considerations, future trade barriers, and the potential for brinkmanship in negotiations could unnerve markets for a period going forward. I would not expect upside surprises from the FTSE (Britain), DAX (Germany), or the Euro STOXX 50 (Europe).<\/p>\n<p><strong>Financials May Have a Difficult Road Ahead \u2013 <\/strong>downward pressure on long-term interest rates also implies a flatter yield curve, which does not play well for banks\u2019 operating margins. In a world of sustained low rates, it could be some time before we see a steep yield curve again.<\/p>\n<p><strong>Bottom Line for Investors<\/strong><\/p>\n<p>Expect constant media coverage that will most likely focus on the uncertainty of the situation, with a bias to the negative. A barrage of doomsday forecasts could tempt many investors to want to \u201cdo something about it,\u201d\u2014sometimes in ways that could run counter to long-term investment objectives. As the market consistently teaches us, sometimes the best response is no response at all.<\/p>\n<p>The overarching message is that investors should resist the temptation to make knee-jerk portfolio adjustments in response to this decision. There are several uncertainties and risks that have surfaced in its wake, but the biggest risk we see in the current market environment is an unforced error by investors\u2014reflexive selling, in our view, would not be the most prudent choice.<\/p>\n<p style=\"text-align: center;\">\n","protected":false},"excerpt":{"rendered":"<p>The UK\u2019s decision to leave the European Union (EU) created a myriad of uncertainties about the economic futures of Europe [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":4122,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59,60,63,71],"tags":[],"class_list":["post-3333","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-professionals","category-institutional-investors","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/3333","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=3333"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/3333\/revisions"}],"predecessor-version":[{"id":11294,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/3333\/revisions\/11294"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=3333"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=3333"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=3333"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}