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Brexit Update

What Has Happened

More than 30 million people of the United Kingdom (71.8% turnout) voted on Thursday June 23rd to decide whether the UK should leave or remain in the European Union. Leave won by 52% to 48%.

Why This Happened

In 2013 a gamble was taken by British Prime Minister David Cameron to appease the ultra-conservative wing of his Tory Party which had threatened to join the isolationist UK Independent Party. To appease this group of voters and to win their favor before the 2015 general election, he promised if reelected, he would hold an “in” or “out” referendum on Britain’s continued European Union membership. At the time this seemed to be a relatively low-risk political ploy to garner needed votes but has turned out to big mistake for Cameron and could have lasting effects Britain’s economy.

Brexit Aftermath for the UK

  • British Prime Minister David Cameron resigned and will serve three more months while his replacement is chosen. The current front runner is London’s Tory Mayor Boris Johnson.
  • PM Cameron is now expected to invoke Article 50 of the Lisbon Treaty which calls for a two-year process to negotiate the logistics of the withdrawal from the EU. Important British trading partners including India and China have expressed concerns about regulatory issues and political opposition that could harm the economies involved.
  • The UK Treasury’s own analysis showed the nation “would be permanently poorer” for leaving the EU regardless of alternative possible scenarios. The report went on to say “productivity and GDP per person would be lower” resulting in weaker tax receipts to the British government. The Bank of England and the International Monetary Fund also warned of long-term effects. Some have dismissed those analysis as “propaganda”.

Global Concerns

  • Depending on how it is measured, the EU ranges from the world’s largest to third largest economy. The trade region easily tops the US and China in both imports and exports.
  • Many international corporations based in places like the US and China have invested in UK operations partly for access to free-trade to the EU. Since the “out” vote won, many of those companies could see reduced profits.
  • Global investment channels may need to be reset depending on the UK’s exit negotiations causing heightened uncertainty that could increase global market volatility.

Additional Uncertainty

  • Exit negotiations could cripple investment and lead to other EU “exits”.
  • The Euro dollar could weaken if “other exit” concerns swell.
  • Billions invested in the UK could be in limbo while London negotiates.
  • In the US, nearly $2 trillion in trade could be called into question.
  • Chinese, Indian, Japanese and other international investors have similar concerns.
  • Massive currency rebalancing may occur as investors move away from the British pound and into cash that is perceived as safer – US dollars, Swiss Francs, and Japanese Yen.

You Are Well Positioned at RetirementInvestor.com

Global equity market reaction has been substantively negative thus far. Safe haven assets such as gold, US dollars, and Japanese yen have been soaring since the vote.

Retirement Investor’s Model Portfolios have been prepared and are well positioned for increased global market volatility. Our current allocations take advantage of “minimum volatility” exchange-traded funds (ETFs) wherever possible. While we expect these funds will still fluctuate in value, they are designed to mitigate downside risk during periods of high volatility. Our minimum volatility funds comprise 40% of our equity position in all of our models and break down as follows in relation to the equity position:

iShares MSCI USA Minimum Volatility ETF (USMV) – 20%
iShares MSCI EAFA Minimum Volatility ETF (EFAV) – 15%
iShares Emerging Markets Minimum Volatility ETF (EEMV) – 5%

Below illustrates the relative performance of these funds versus a comparable non-minimum volatility ETFs:

June 24 return as of 4:00EST

Retirement Investor’s – iShares MSCI USA Minimum Volatility ETF (USMV) = (-1.77%)
The Non-Min Vol Version – iShares S&P500 Index ETF (IVV) = (-3.54%)

Retirement Investor’s – iShares MSCI EAFA Minimum Volatility ETF (EFAV) = (-5.79%)
The Non-Min Vol Version – iShares MSCI EAFA Index ETF (EFA) = (-8.59%)

Retirement Investor’s – iShares Emerging Markets Minimum Vol ETF (EEMV) = (-4.39%)
The Non-Min Vol Version – iShares Emerging Markets Index ETF (EEM) = (-6.10%)

Additionally, we expect that our 5% “safe haven” position in gold, iShares Gold Trust (IAU) will perform well in the near term and help to smooth overall volatility across all models.

June 24 return as of 4:00EST
Retirement Investor’s – iShares Gold Trust ETF (IAU) = +4.95%

Retirement Investor’s portfolios also feature US Treasury’s, iShares 7-10 Year Treasury Bond ETF (IEF), as 60% of its fixed income positon. We foresee global investors to flocking to these bonds for safety. We expect them to perform quite well and further smooth volatility for portfolios that include these bond funds.

June 24 return as of 4:00EST
Retirement Investor’s – iShares 7-10 Year Treasury Bond ETF (IEF)= +1.38%

In summation, while we do expect significant global market volatility due to global economic uncertainly in the near-term, we are properly diversified and well positioned to weather the storm. For those with the means this should be considered a buying opportunity. We strongly believe investors who remain calm and disciplined will be reward.

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Ryan Groves

Ryan Groves, Partner at RetirementInvestor.com and Principal at Black Swan Wealth Management, holds degrees in both Finance and Business Management from Merrimack College. Ryan has been in the financial services industry for more than 17 years… as a Financial Advisor working with individuals and families as well as a Business Consultant where he used his knowledge and expertise to educate other Financial Advisors about a better way to run their businesses; by focusing on keeping total investment expenses as low as possible while improving investment quality and client service. This combination of skills and experience gives Ryan a unique vision to guide his endeavors going forward.

4 comments on “Brexit Update”

  1. Thank you for this in depth analysis. In the alternative style in addition to gold and real estate, an etc of currencies ; is this a good idea now?

    1. Thank you Arumugam. We have no changes planned for the portfolios at this time. Even before the Brexit we expected volatile markets through this year’s United States Presidential election. The portfolios are well positioned for such markets.

  2. Given that the hit has been taken already and the alternatives have had an increase, do you think it is a good idea to go all in with cash on the sidelines or dollar in over the next few months.

    1. Hi Tony-

      Thank you for the question. No, we feel that the portfolios are well positioned for near term volatility. The problem with moving to cash is trying to time when to get back in before missing the rebound. Studies show that the risk of missing the best “recovery” days after a negative event are high and can have a sizable impact on positive portfolio performance. The best thing to do, as we like to say at the end of each of our Monthly Market Reviews, is to “stay invested, stay disciplined, and let the markets work for you.”

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