Brexit: UK’s Historic Referendum Prompts Decline in Markets but Offers Opportunity

As the results poured in last night, UK citizens voted decisively to leave the European Union 52% to 48%, 43 years after the UK first joined the EU in 1973. Britain’s decision to stay or leave the EU or “Brexit” as it has been called, has been followed closely across the world. Brexit marks the first exit by a major EU member.

The Brexit decision reflects a growing trend to reject globalism and a desire for UK independence. This significant decision immediately prompted declines in global markets.

Brexit has immediately triggered a decline in global equity markets, plummeting bond yields and a significantly weaker British pound. Gold however has rallied unsurprisingly.

While it will take several months and possibly years to know the full long-term impact of this decision on Britain, the EU and also the U.S., the current impact on the U.S. is not expected to change much. The U.S. remains in a stable environment of low growth and low interest rates.

Asia markets also are little affected by these changes as they are supported by a mix of economic growth and easier monetary policy.

Recognizing that Opportunity Still Exists in these Markets

While volatility does present opportunity, it also can cause stress as investors assess their true risk tolerance - something that cannot be gauged accurately beforehand in a textbook or lab but only during a period of actual market volatility. Market dislocation can help bring new ideas into focus that can range from purchasing certain assets on sale to trimming out others.

Despite concerns, opportunity is still present in these markets. Capital Wealth Planning can assist you in navigating these areas.

Possible areas include:

  • Sell-offs in global shares and risk assets will create buying opportunities.
  •  Higher performance in large-cap FTSE 100 Index compared to the domestic FTSE 250 Index.
  •  UK currency drop will benefit large companies that have overseas earnings.
  • Domestic sectors such as retail, homebuilders and financials will drop in value, leading to investment opportunity. Commercial property values may fall as much as 10% in the next year with lower tenant demand and shorter-leases.

Brett’s Expected Impact

The greatest effect brought about by Brexit will be felt most likely in the sterling and UK equities, followed by the Euro, European equities, global equities and peripheral European bonds.

The UK vote will likely trigger a weaker Euro over time. This will lead to pressure on European stocks and credits as well as peripheral bonds (e.g. Italian government debt) because of lower growth and job losses. Government budgets however will remain in effect most likely as government bonds will remain in demand when rates are low.

The first priority of the Bank of England will be to offer sufficient liquidity to prevent funding concerns. As the British pound falls in value, the magnitude and the range of volatility will affect other primary decisions such as the central bank’s decision to cut interest rate (currently at 0.5%) down to zero. Credit rating agencies may also adopt negative outlooks for UK government bonds, which in turn would lead to downgrading. There may also be losses in service exports and the flow of investment, which will counteract any benefit derived from the UK having lower payments to the EU.

Over the long term, the UK economy will most likely be able to handle the repercussions of its decision to leave the EU and continue to thrive. The UK has experienced some of the strongest growth among the G7 nations in the last four years and hence is well positioned to handle long-term effects.

While the full extent of the effect of the UK’s historic Brexit remains unknown, portfolio planning must continue unabated. New opportunities will arise. Investors who are willing to stay focused on both opportunities and their goals with a future mindset, will most likely benefit significantly in both areas.

Our Approach: Strategic Allocation and Covered Call Writing

While volatility will remain in effect in markets for the short-term and Brexit will undoubtedly have long ramifications on trade, labor, regulation and currency, investors can benefit from strategic allocation to gold and other assets. The importance of having a diversified portfolio with some hedging strategies cannot be underestimated.

Our CWP Downside Protection

At Capital Wealth Planning, we have always actively hedge our clients’ assets proactively to reduce risk. We do not foresee disruption in the management of our client portfolios.  If anything, our covered call writing is a great way to take advantage of volatile markets.

We assist our clients with a comprehensive set of innovative and proven solutions and investment insights with sophisticated and carefully thought out risk and portfolio analytics.

Consider investing in a Covered Call strategy with Capital Wealth Planning today. Call us at 239-593-2100 to find out how we can help you safeguard your assets and build your wealth for both your retirement and your future.