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Brexit - What now?

| June 24, 2016
MPCA Special Updates

Our inboxes here at Madison Park Capital Advisors have been inundated today with emails from trusted economists, fund companies, and market commentators on the “Brexit” vote that took place yesterday. The results were “shocking,” “unexpected,” “surprising” – you pick the adjective – and now economists, policy makers, and investors alike are trying to grasp the implications.  We at MPCA are trying to do the same. Now that Great Britain has decided to leave the European Union, what are the implications and what should we be focusing on? What does this all mean for our clients’ investment portfolios and the risk levels we should be adopting moving forward?
As we are seeing currently, there is a lot of volatility in the markets, both here in the United States and across the globe. In the very near term we would expect there to be more volatility. Keep in mind that this is at least a two-year process to untangle the UK from the EU. Most of what the market is reacting to is the unexpected outcome of the vote.  The markets don’t like two things – surprises and uncertainty – and yesterday’s vote gave them a heavy dose of both. Over the next couple years you can expect lots of twists and turns in this ongoing saga called “Brexit” – 'Br'itain 'exit' (from the EU).
There has been a flight to safety, which means capital has moved to “safer” parts of the world that are less volatile than Europe as a whole. The dollar is stronger as is the Yen relative to the Euro and Pound. Bonds and high quality fixed income investments are a beneficiary of this flight to safety as we see the 10-year treasury yield down to 1.56% and the German Bund once again yielding negative returns. There are many crosscurrents and it is very difficult to understand every nuance that could affect you.
Longer term, if politicians in the UK make meaningful reforms and initiate changes in the economy that will enable growth, this could turn out to be a very good thing for the citizens on the UK. If they don’t seize opportunity and make good choices, we could very well be looking back at this moment and second guessing how the vote turned out. If this turns out to be the tip of the iceberg and other countries in Europe decide to leave the EU, you could see some additional disturbances, both politically and in the markets. That still remains to be seen, and rest assured leaders and citizens in countries like France will be watching closely (“Frexit” anyone?).
From your portfolio point of view, we have been pretty conservative since earlier this year and that continues now. The high levels of volatility seen in today's markets will be relatively muted in your accounts, since a large portion of the portfolios have significant percentages of fixed income. This overweight to bonds has served to offset weakness in the equity parts of the portfolio. As far as the equity positions, we have most of our assets in dividend and “low volatility” investments, so we are seeing considerably less losses in those portions of the asset allocation. The net of all this is your portfolios today will see a fraction of the volatility of the markets as a whole and what the evening news will be talking about.
As always, we are continually monitoring portfolios and weighing the appropriate amount of risk to be taken for each client’s risk tolerance. We invite your questions, so please reach out to us as you see fit.