Last night, voters in Great Britain had the opportunity to vote on whether or not the country should remain as part of the European Union or to leave. It looks like they voted to leave.
Clearly, the markets had not anticipated this outcome. Also, the markets appear to not think that this is a good outcome for Great Britain and the Euro Zone. That is the great thing about democracy, sometimes when the people are asked for their opinion and they give an answer that was not expected. The markets are always adjusting prices based on news and sometimes if that news is unexpected, those adjustments can be rather violent. However, once the market has adjusted, things tend to get back to normal. What is normal in this situation? Leaving the Euro Union is not the same as immediately closing all of the borders and ending all trade with Europe and the rest of the world. “Leaving” is a negotiated process and will most likely cause the British economy to suffer in the short run and perhaps in the long run. It will also most likely weaken an already anemic European economy. However, these countries still need each other and any re-negotiated trade policies will still include keeping key agreements in place. Great Britain and Germany (Euro) are still massively important to each other’s economic well-being not to mention the well-being of the rest of the world.
From an investment point of view, our fund managers in the international asset classes will also be adjusting accordingly. Remember, these are professional money managers who have deep a understanding of all of the linkages and inter-dependence and should adjust accordingly. We selected the managers/funds we use because they have successfully navigated many of the recent roadblocks (Greece, etc.) over the past 5-10 years. Avoiding Europe or avoiding international all together may seem prudent in the short run. But as we have seen time and again, these are the times that provide opportunities to buy low. Selling low is not a successful investment strategy.
Always please be reminded that your portfolio should already be allocated based on your risk profile and based on your own investment objectives, time horizon and tolerance for volatility. Nothing that is happening right now should cause you to change that. However, if you feel the need to adjust your allocation it is your prerogative. Reducing risk may feel good in the short run, but may cause you to miss out on long term growth opportunities.
Click on the links below for initial thoughts from Deutsche and PIMCO.