There is lots being written today about what this decision (to leave the European Union) means for the UK, Europe and the world, so I will defer to the political /social experts to sort out all of that and the future uncertainties on those fronts.
Yesterday financial markets responded with their opinion, sending the Brittish Pound to record lows and equity markets down some 8% in Europe and Japan and 3-4% in the UK and the US.
What does it mean on an economic scale? The world has stepped closer to a global recession:
We are now awash in a world of uncertainty. When uncertainty strikes, confidence suffers and businesses postpone investment plans and consumers postpone spending plans until they have a better feel for their financial future. This in turn, shuts down the wheels that turn the economic machine.
Monetary policy has proven an ineffective motivator of confidence and fiscal policy (ravaged by the 2008 financial crisis and "great" recession) has been going the wrong way in many countries. Austerity does not motivate economic growth.
The problem is that there is more global debt now than there ever has been and low interest rates that have fuelled much of this debt are low and headed lower which inspires even more debt. The great "de-leveraging" that was expected post 2008 became "unfinished business".
So we will watch as the experiment plays itself out. Unfortunately, the "populist, anti-establishment upprising" will be given momentum and there may not be enough time to wait and see the results of the Brittish situation before other nations make their own decisions and even more uncertainty lies in that direction.
Especially if the US moves in that direction.
A reader writes: "What’s is your contingency in this unexpected turn of events?"
As I suggested in yesterday's blog, we were not expecting this particular outcome, however we have been on guard for increased volatility in financail markets and prepared our High Rock models well in advance by increasing our holdings of cash, cash equivalent investments and Candian Government bonds. At all times our first priority is to protect our clients (and our own) capital.
There will be, at some point of time in the future, some good opportunities, but if you are fully invested, you cannot take advantage of those opportunities, you just have to sit, wait and hope that the cycle evolves quickly so that you can get back to growth.
The S&P 500 is back to levels it attained in the fall of 2014. The benchmark All Country World Index is back to levels it was at in the fall of 2013. It will probably take your standard 60% equity / 40% fixed income model a few more years to get back to its historical average annual returns (oh and remeber, historical returns are not in any way a guarantee of future returns...). If you are patient, you can wait it out. Or you can look to adding a more tactical approach to the management of your wealth and investment portfolio.
Feedback, questions, concerns (I would love to hear from you)....
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist