Brexit shocks the world as UK votes to leave EU, pound & stocks plunge, gold soars

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2 puzzle pieces: One containing the British Flag and the other the European Union / EU flag. Is UK leaving Europe with the BREXIT?North American investors woke Friday morning to the shocking news that Brexit is a reality: the United Kingdom has voted to leave the European Union.

Stocks around the world are plunging while the price of gold is soaring.

As I write this just before 5 am, European stocks were down 8%, while gold was soaring almost 15%:  the most in 42 years for British buyers.

One British friend, a banker,  told me on Facebook that “it’s a very sad day for our country and Europe as a whole.”

Investors caught flatfooted

Were investors caught flatfooted?

“Absolutely,” she told me.

So what now? With 52% voting to leave and 48% to stay, the BBC says the report was decisive.

Here is the Economist’s report around 5 am: in an unprecedented move, the British weekly newspaper delayed publication of the print edition in order to get the historic vote in. They called it a “seismic shock.” It said this:

As soon as the results started to come in, the pound started to plunge. From around $1.50 before the polls closed, the pound dropped to $1.45, then $1.40, and then to $1.34, its lowest level since 1985. It was the worst day for sterling since the currency floated in the early 1970s. The shock was also reflected in equity markets, both within and outside Britain. The Nikkei 225 average in Tokyo has dropped 8%.

Pound suffers biggest hit since 1985

Reuters reported around 4:30 am about the worldwide plunge in stocks. It said this:

Billions were wiped from share values as Europe saw London’s FTSE .FTSE drop 6 percent in early deals, Germany’s .DAX and France’s CAC 40 .FCHI slump 7.5 and 9 percent and Italian and Spanish markets plunge more than 11 percent  … The British pound collapsed no less than 18 U.S. cents, easily the biggest fall in living memory, to hit its lowest since 1985. The euro in turn slid 3.2 percent to $1.1012 EUR= as investors feared for its very future

Here’s the New York Times early morning report, It noted the UK is the first country to leave the 28-member bloc. And it said this:

Financial markets, which had been anticipating that Britain would vote to stay in, started plunging before the vote tally was complete, putting pressure on central banks and regulators to take steps to guard against a spread of the damage.

What to do?

Generally, panic is not a useful response to such unpleasant surprises and if you had a normal balanced portfolio, there’s little point in trying to slam the barn door after the horse has escaped. True, most investors seemed complacent, no doubt lulled by the fact past close calls — like Quebec and Scotland — opted to remain in comparable situations.

That adds to the air of unreality here.  Monitor events by all means and talk to your financial advisor but if anything there may be more buying opportunities cropping up in the next days and weeks. Buy low, sell high and all that.

Certainly for Friday, I’d just be an observer and see if there will be signs of stabilization or evidence that the initial market response may be an overreaction.

On the other hand, if you believe markets were overpriced and due for a fall, we’ve just witnessed the unexpected sea change that says all bets are off.

Stay tuned.

Don’t do a thing … for now

PS: A few hours after writing the above, the New York Times published advice along similar lines: Advice as Markets react to Brexit: Take Some Deep Breaths and Don’t do a Thing.

Here’s what Tyler Mordy at Forstrong says about the investment implications of Brexit.

What one robo adviser is telling clients today about Brexit

PPS: Here’s what robo-adviser JustWealth sent to clients this morning to calm their fears (at one point markets were down over 500 points, although they had started to pare back some of those losses as this is posted).

Signed by JustWealth’s chief investment officer, James Gauthier, here’s the bulletin:

gauthier
James Gauthier (Linked In)

Yesterday, a referendum was held in the U.K. to determine if the U.K. would exit the European Union, known as the “Brexit” vote. Despite advance polls indicating that the likely outcome would be for the U.K. to remain, the surprising result was a 52% majority in favour of leaving. This has already had a profound negative impact on global equity markets and is expected to carry over into North America when markets open later this morning.

The economic implications of this event are certainly not good for the U.K, or Europe in general, but more importantly for equity markets, it introduces a new element of uncertainty as there is no precedent for an event of this nature and magnitude. In times of uncertainty, investors tend to flock to the safety of government bonds, gold, and the U.S. dollar, and this is what is playing out so far today. In addition to equity markets declining, the British Pound and Euro will be pressured, and oil and other commodities may also fall.

Most Justwealth clients have exposure to equity ETFs, and some in particular will have a small exposure to the iShares Core MSCI EAFE IMI ETF, (ticker symbol XFH) which has some exposure to the U.K.

While the news is certainly not positive, it is worth noting some of the precautions we have taken in our client portfolios:

  • Compared to most other companies, we have very limited exposure to Europe and the U.K. in our client portfolios.
  • We have selected ETFs that hedge currency exposure in European countries so while the ETFs will decline with the equity markets, the ETFs will not feel the impact of declining European currencies
  • ETFs used in client accounts for U.S. markets are NOT hedged, meaning that while again these ETFs will decline with U.S. equity markets, the ETFs will benefit from the impact of a rising U.S. dollar
  • Most clients have exposure to Bond ETFs, which should do well today, proving why diversification is important. Note that higher risk bonds such as high yield or corporate bonds may not perform as well today

Today could very well be the worst equity market day for 2016, but we do not expect that this will turn into the Great Recession that we saw 8 or 9 years ago. Equity markets could rebound quickly, or they could fall further in the short run – we don’t know and nobody else does either!

What is predictable however, is that short-term declines become irrelevant in the long term. We are happy to chat with our clients at any time regarding market events or our investment views.

 

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