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14 Jul 2016


The Brexit referendum result signalled the end of 70 years of increasing European integration and unity. WILLIAM FRASER comments on the vote that will change the course of history and the implications for investment portfolios.

The vote for a British exit from the EU highlights a growing global trend: From Brexit to Rome to the popularity of Trump and Sanders, disenfranchised citizens are angrily voting for anti-establishment alternatives. People are expressing the wish to take back their government from the power elite who currently control it.

There are two principal reasons for this trend. Firstly, lower income earners feel abandoned and neglected by their representatives. Falling first world living standards contrast starkly with rising wages in Asian and other emerging market economies that benefited from free trade agreements with wealthy nations.

Secondly, there is growing hostility against the migration of cheaper labour into wealthier economies, being net recipients of lower paying jobs and considerable social benefits. Increased migration has also contributed to a less cohesive national identity, threatening the sovereignty of nations. '

The uninspired use of a simple process to manage a complex issue – a ballot with a binary outcome – contrasts with two characteristics we employ when making investment decisions, namely probability- weighted scenarios and management of the risk of loss (see It’s All About The Risk).

The British in-out referendum was always going to be closely run. Euro-scepticism and hostility to immigration have grown. On a probabilistic basis, the result was never certain. Yet, the appalling economic consequences of “leave” far outweighed the gains from “remain.” To remain would imply business as usual. But in the event, the fortunes of the pound, favourable trade agreements, the large UK current account deficit and potential UK ratings downgrade will ignite a long period of uncertainty and opportunity loss.

What does this mean for investors?

Capital markets are set for renewed and potentially brutal volatility, as traders take positions deemed most favourable by the referendum’s outcome. UK and EU monetary and fiscal policy is expected to remain highly accommodative to limit the immediate economic fallout, with interest rates staying low or declining further. The political policy response will be to the right.

While we believe there will be little long-term impact on global company earnings, Foord’s local and international portfolios will not be immune from the near-term downside volatility, despite the emphasis on quality businesses and conservative portfolio construction. Now is not the time to take unnecessary investment risk in portfolios. The future is uncertain and the tail event risk has intensified. It is therefore paramount to invest in businesses with strong balance sheets, exceptional management teams, diversified earnings streams and good growth potential.

Volatile markets are the ideal time to accumulate quality businesses and position portfolios for the next up-cycle. All of Foord’s portfolios have relatively significant cash holdings, which may now be judiciously applied to accumulate preferred investments at lower prices, a scenario for which we have waited patiently. Considerable gold ETF investments in our asset allocation funds provide additional protection and we foresee the probability of a long-run bull market in gold.

Although we will take advantage of the increased volatility, capital preservation remains our primary thesis during these unsettled times. Investors should take special care not to react imprudently by selling into declining markets.


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