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24

June

Investment Commentary on Brexit

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DT Investment LogoFinancial Markets Commentary – The Aftermath of Brexit

June 24, 2016

To the surprise of most investors around the globe, yesterday the U.K. voted 52% to 48% in favor ofleaving the European Union (EU) after more than four decades in a stunning rejection of thecontinent’s postwar political and economic order. Prime Minister David Cameron resigned, statingthat he would serve another 3 months until his replacement is elected. Financial markets around theglobe responded with stocks selling-off while bonds and gold are rallying.

The result of the vote is important for a number of reasons, braut none more than the fact that globaleconomic growth has been fragile since the Great Recession of 2008. Brexit (the British exit from theEuropean Union) is a confidence shock to global economic growth. The U.K. now faces a period oflong and drawn-out divorce talks with the EU. Under EU laws, the highly-negotiated process ofwithdrawal has up to 2 years to be completed. The level of uncertainty and volatility in financialmarkets will likely remain elevated for quite some time.

In the days leading up to yesterday’s vote, global financial markets were positioning themselves forthe U.K. to remain in the EU. Therefore, markets were caught offside and this swift and deep sell-offis the result of an imbalance of sell orders. Within the next few days, financial markets should moveback into balance. Fortunately, global central banks and monetary authorities stand ready to maintainand if need be, increase liquidity in the financial system. The Fed will continue to hold off on raisinginterest rates, perhaps for the remainder of this year.

With no real way to assess the likelihood of the U.K. leaving the EU, from a risk managementperspective we felt that it was prudent to tactically reduce all direct exposure to European stocks lastweek. We are now significantly underweight our strategic targets for international, developed marketstocks and underweight risk assets in general. The proceeds of the sale remain invested in cash as wefurther assess the ramifications of this historic event and look for opportunities in risk-based assets.

 

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 economic conditions and the vagariesof speculators among other risks. Further, diversification and strategic or tactical allocation do not assure profit or protect against loss in declining markets. Index performance returns do not reflect anymanagement fees, transaction costs or expenses. One cannot invest directly in an index. Past performance does not guarantee future results.


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