Brexit

Published: July 1, 2016

The United Kingdom’s (UK) seismic vote to leave the European Union (EU) is changing the political, economic and investing climate across the UK, Europe and around the globe.  We would like to take this opportunity to share our thoughts.  We are carefully considering the impact of Brexit, and the potential that this could represent a broader trend toward nationalism and market protectionism. This theme could impact investing for years to come. 

We believe our philosophy of long-term investing in high quality companies with durable businesses is sound even in the face of Brexit. While our overall exposure to companies with significant revenue coming from the UK is quite small, we do maintain exposure to the general EU economy. To be ready for the unpredictable future, we will continue to employ diversification and asset allocation across global markets as tools to manage political, economic and currency risk. 

Here are the five things at the top of our focus list: 

Benign Monetary Policy

  • For US financial markets, the Federal Reserve Bank is now much more likely to be supportive of economic growth and may slow increases in interest rates. Monetary authorities around the world will continue to lean in the same direction. These moves will likely support our focus on the US stock and bond markets.

Uncertainty Leads to Volatility

  • Political and economic uncertainty are likely to be heightened for quite a while, perhaps permanently, as other member states reconsider their commitments to the EU. Greater volatility of financial markets is a predictable result so it may be counterproductive to overreact to short-term swings in the market.

Fears of another Great Recession are Unfounded

  • We do not believe that the Brexit will create broad and deep systemic damage to the US or major EU economies, and even in the UK, the damage should be contained. Longer term the UK, freed of Brussels bureaucracy and the EU, could achieve improved growth.  

Globalization Out of Favor

  • Brexit is only one part of a longer swing of the pendulum. The world reaped huge dividends from globalization in recent decades, but Brexit reflects greater pursuit of economic advantage by individual countries, which could create unique investment opportunities.

Focus on the Fundamentals

  • Brexit is big news this week and is driving volatility across all financial markets. In time, Brexit will likely recede to another footnote on the long list of global events. We will continue to own and search for opportunities to acquire excellent businesses with capable management at reasonable prices. Event-driven market dislocations often create more of these opportunities.

Important Disclosures

This material is provided for informational or educational purposes only and should not be construed as investment, accounting, tax or legal advice. Always consult a financial, tax and/or legal professional regarding your specific situation. This communication is not intended as a recommendation or as investment advice of any kind. It is not provided in a fiduciary capacity and may not be relied upon for or in connection with the making of investment decisions. Nothing herein constitutes or should be construed as an offering of advisory services or an offer to sell or a solicitation to buy any securities or a recommendation to invest in any specific investment strategy. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future returns. The views expressed herein are as of a particular point in time and are subject to change without notice. The information and opinions presented herein are general in nature and have been obtained from, or are based on, sources believed by Klingenstein Fields Advisors (“KF Advisors’) to be reliable, but KF Advisors makes no representation as to their accuracy or completeness. Although the information provided is carefully reviewed, KF Advisors cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided. KF Advisors represents two investment advisers registered with the Securities and Exchange Commission: Klingenstein, Fields & Co., L.P. and KF Group, LP. If you are a KF Advisors client, please remember that it remains your responsibility to advise KF Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.