Thought Leadership on Accounting and Finance presented by CliftonLarsonAllen.
The waning days of the second quarter of 2016 brought capital market participants a surprise in the form of the Brexit, Britain’s momentous decision to leave the European Union (EU). We must acknowledge that the “leaves” outnumbering the “stays” in the U.K.’s referendum is not the result we, nor many political and economic analysts, expected. But the result ushers in a period of political, economic and market uncertainty for the U.K., EU, and economies and markets worldwide. In addition, there are legitimate concerns with Brexit’s domino effect, in which other countries may host similar “leave or stay” referendums. While only a couple of weeks ago it seemed inconceivable to consider the dissolution of the EU, that potential outcome is no longer so implausible. And yet, there are a few optimistic points worth considering:
- We see sell-offs in global risk assets as buying opportunities in the United States and Europe, where many world class companies with global franchises are domiciled.
- We acknowledge that there are likely to be negative consequences to the European economy. However, the U.K. only represents about 4% of global gross domestic product. So by itself, a slowdown in the U.K. is not highly material to U.S.-based investors. A slowdown in the EU may also occur, as it was already at risk of recession. Accordingly, we expect the European Central Bank (ECB) to be very aggressive in its response in an effort to avoid a slowdown.
- Better investment opportunities occur when there is uncertainty and market volatility. Conversely, future returns are rarely attractive when markets have been strong, as they have already priced in a healthy economic outlook. While unnerving, market volatility is actually setting the table for better returns going forward. We’ll use this environment to opportunistically rebalance portfolios back to targets.
The vote does not change our desire to remain globally diversified. However, it does reinforce our view on the importance of including other asset classes like high quality bonds and alternative investments (i.e., different from traditional stocks, bonds or cash) in portfolios where appropriate. Exposure to these nontraditional assets can be highly beneficial to portfolios during market downturns as well as over the long term.
Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor. CliftonLarsonAllen Wealth Advisors, LLC disclaimers
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