Trade Update – June 15, 2016
Yesterday we eliminated all direct exposure to European stocks by selling IEV (IShares Europe ETF) across assetallocation accounts greater than $100,000. Proceeds from the sale were invested in cash (money market sweep fund).
|IEV Exposure Pre-Sale|
|Ultra- Conservative Plus:||1.00%|
The odds of Brexit (the British exit from the European Union) have risen significantly over the past few days. Recent polls via phone and online survey show the “Leave” side beginning to overtake the “Remain” side. The economic and financial implications of Brexit could be enormous for the U.K. Foreign investment and jobs would decline while public services would suffer. The U.K.'s large current account deficit makes it highly reliant on capital inflows. Foreign capital inflows would likely dry up if the country were to leave the European Union (EU), sending the poundlower. Gilts (U.K. government bonds) would likely rally given that the Bank of England would need to keep interest rates lower for longer to stimulate the economy. Stocks would probably decline.
The bigger and most important question is what Brexit would mean for the strength and cause of the EU. The main risk is that the U.K.'s voluntary withdrawal from the EU increases the odds that one or more of the euro area's struggling economies eventually decides to abandon the common currency. Such fears could easily turn into a self-fulfilling prophecy.
We do not think that the U.K. will leave the EU. The negative consequences of doing such far outweigh the positives. However, we don’t want to underestimate public will given the magnitude of anti-political establishment views currently sweeping across the developed world. With no real way to assess the likelihood that Britain does indeed leave the EU, from a risk management perspective we feel it is prudent to tactically reduce all direct exposure to European stocks. We will reassess the situation after the vote next Thursday (6/23).
Andrew C. Zimmerman - Chief Investment Strategist
Notes:The DT Investment Partners’ Market Commentary discusses general developments, financial events in the news and broad investment principles. It is provided for information purposes only. Thematerial represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Investments in various assetclasses entail different investment risks. For example, small cap equities tend to be more volatile than large or mid-cap equities. International equities and emerging markets have exposure to currencyfluctuations, foreign taxes, political instability and the possibility for illiquid markets. Fixed income investments involve interest rate and credit risks among others. Real estate investing includes riskssuch as declines in value of real estate, changing economic conditions, tax laws or property taxes. Commodities’ investing is highly volatile and subject to changing economicconditions and the vagaries of speculators among other risks. Further, diversification and strategic or tactical allocation do not assure profit or protect against loss in decliningmarkets. Index performance returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index. Past performance does notguarantee future results.