As part of the ongoing investment management process at MD, precautions had been taken to ensure that our portfolios were best positioned regardless of the referendum outcome. After the U.K. voted to leave the European Union (EU), MD’s overall defensive positioning was able to navigate the market volatility.
MD portfolios were well positioned for Brexit
MD’s international equity mandates are most directly exposed to Brexit and they have performed in line with expectations since the referendum result. We benefited from being underweight U.K. and EU equities, specifically financial companies, which had been hit the hardest. Within financials, we have been underweight banks in particular as we see some fundamental issues. In certain foreign markets, banks are increasingly regulated, lack transparency, are exposed to slow growth and are highly impacted by investor sentiment.
Similarly, our active currency strategy was underweight the pound sterling and euro which have devalued sharply, insulating our portfolios. While not directly related to Brexit, our overall positioning in Japan contributed to performance. Our overweight to the yen combined with an underweight to Japanese equities proved favorable.
We were positioned well going into the vote and as a result, since the referendum was decided, there have been no major changes to MD portfolios. There have been changes in the price of some securities and, in certain cases, these fluctuations do not accurately reflect their underlying values. This is something that MD investment managers will aim to capitalize on. Mondrian Investment Partners Ltd., managers on the MD International Value Fund and the MDPIM International Equity Pool commented “We have made no changes to your portfolio in the immediate aftermath of the U.K. Brexit vote. Global markets, particularly in Europe, are extremely volatile which could present opportunities and we will assess equity and currency movements in the context of our disciplined approach.”
Managing all potential risks is part of the investment management process at MD. The Brexit scenario was considered when positioning our portfolios for long-term success.
How have markets reacted to Brexit?
It is clear that the uncertainty in the wake of Brexit is a negative for the U.K., the EU and global growth. The global economy is already struggling for traction and the added uncertainty will not make it any easier. Policy makers are likely to tread lightly as to avoid upsetting the markets further. Therefore, we are likely to see interest rates remain lower for longer. The U.S. Federal Reserve held off a rate hike in June and one of the major reasons was the risk of Brexit. We will likely see a similar attitude persist.
As expected, financial markets around the world have corrected, the hardest hit being the U.K. and the EU. There has been a shift to “safe” assets as we have seen gold rise and the pound sterling/euro lose ground to the U.S. dollar. To put the impact of Brexit on global financial markets into perspective, we are still in a better position now than we were earlier in the year – stock prices are above lows, bond yields remain low and the price of oil is higher. We have to remember that markets advanced prior to the referendum, fully expecting the vote to stay. That expectation was wrong and the markets have forfeited those gains.
MD will continue to monitor the situation for new developments and opportunities. If you have questions about how you or your financial plan may be impacted, we encourage you to contact your MD Advisor for more information.