Uncertainty will persist as global financial markets try to figure out what the U.K. and the new European Union (EU) will look like as U.K voters have decided to leave.
What does this mean for your MD investments?
There will be no immediate, large scale changes to MD funds and your investment portfolios. As part of the ongoing investment management process, the proper precautions have been taken to ensure that our funds and your portfolios are best positioned regardless of the outcome of the vote. We recently reduced EAFE (Europe, Australasia and Far East) equities in our most recent asset allocation review. For companies held in our funds with U.K. or EU exposure, the British exit (Brexit) risk was analyzed and monitored. The situation, while serious, was simply added to the regular assessment and investment management process.
From an asset allocation perspective, we recently shifted to an underweight position in U.K. and Europe equities as part of our reduction in EAFE exposure in MD international investment portfolios and funds. Additionally, the pound sterling and the euro are among the largest underweight positions in our active currency strategy. The financial sector (expected to be heavily impacted by the decision) is also underweighted, not only in our international funds, but in our broader lineup as well.
Our equity positions in the U.K. and the EU tend to be global market leaders with predictable long-term growth in structurally growing markets. These companies typically generate a large portion of revenue from global markets, partially insulating them from Brexit. Companies that are more focused on the domestic economy are likely to be the most impacted. Given the comfort with the underlying investments held, MD and our European partners remain comfortable with our exposure.
We expect our overall defensive positioning to navigate the volatility better than the broad market while global financial markets react to an independent U.K. and the new EU.
What does the U.K. leaving the European Union mean?
The vote to exit the EU is unprecedented as it has never happened before and the uncertainty will likely negatively impact the U.K., the EU and the global economy. The Bank of England went as far as to warn of recession. We will likely see a drop in global financial markets, a devaluation of the pound sterling and the euro over the short- to medium-term and a shift to safe assets like gold. Central Banks around the world will be monitoring financial markets very closely and are ready to step in, if necessary, to ensure their proper function. A prolonged period of economic and political uncertainty is likely and this in a time when the global economy itself is already struggling for traction.
The biggest concern for the U.K. is the ongoing relationship with the EU as nearly half of the U.K.’s exports go to other European countries. Will the U.K. retain its commercial access? How will immigration be impacted? How will this impact London’s financial industry, a major contributor to the economy, as regulations change and relationships rewritten? Will EU foreign investment into the U.K. dry up? Unfortunately, there are no clear answers at this time and the U.K. will need to find a new leader to guide them through this important time as Prime Minister David Cameron announced his resignation shortly after the result was announced.
Terms of a new relationship between the U.K. and the EU will be determined over a two year period. The medium- to long-term impact of the exit will depend on the outcome of these negotiations. Financial markets dislike uncertainty and the two year waiting period just adds to the discomfort.
Losing its second largest member could put the EU at risk, the larger issue being the precedent being set and further dissent from the EU arising. A lesser issue, while still important, is the many European countries like Germany that send a large portion of its exports to the U.K.
With further uncertainty in Europe, other programs from other regions will need to proceed with caution. For example, coupled with internal indicators, the U.S. Federal Reserve (the Fed) decided to hold rates steady last week to avoid upsetting the markets further. Brexit will likely be a consideration for the Fed in the future.
Canada will need to rethink the Canada-EU trade deal that was agreed upon earlier this year. The U.K. is Canada’s largest trade partner in the EU and will no longer be part of this agreement. Renegotiating with Europe and establishing a new agreement with the U.K. will be complex and time consuming. Moreover, the priority of Canada’s relationship will be behind larger trade partners like the U.S.
We will continue to monitor any new developments as further details are made available. 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.
The U.K. Votes to Exit the European Union
What does this mean for your MD Investments?
June 24, 2016
Managing all potential risks is part of the investment management process here at MD. The scenario of a British exit (Brexit) has been considered and the proper precautions have been taken to ensure that our funds and your portfolios are setup for long-term success.
We are not expecting to make any additional major changes to MD funds and to your investments as they have been positioned with the risk of Brexit in mind. From an asset allocation perspective, MD international investment portfolios and funds are currently underweight U.K. and European equities. Additionally, the pound sterling and the euro are among the largest underweight positions in our active currency strategy. The financial sector (expected to be heavily impacted by the decision) is also underweighted, not only in our international funds, but in our broader lineup as well.
MD is expecting short-term market volatility as the markets adjust to the result. An exit from the EU has never happened before and the uncertainty surrounding the issue will further upset the markets. Central Banks around the world will be monitoring financial markets and are ready to step in, if necessary, to ensure their proper function.
An update will be posted later today. We will continue to monitor the situation and provide further details. If you have any questions, we encourage you to contact your MD Advisor for more information.