Global Fallout From Brexit

Extremely Volatile Markets

July 1, 2016

While the first six weeks or so of 2016 resulted in extremely volatile (and negative) markets, since then, they have been very resilient in the face of tepid earnings and general economic growth. Even the shock Brexit result was a mere downward blip in the charts that lasted for just a matter of days. Volatile periods, such as what we have seen in the first quarter of this year, provide attractive investment opportunities. Our managers are finding those opportunities not only in equity markets, but in the corporate bond market.

The Bank of Canada is unlikely to tinker with rates any time soon. As far as the Fed is concerned, many believe the next rate hike may not come until 2018. Over the longer term, as has always been the case, market levels will be dictated more than anything else by corporate earnings. There has been, over much of this year so far, something of a disconnect between those two things. Current levels clearly indicate a firm belief that earnings will be improving substantially in the near future. Whether they in fact do, of course, remains to be seen.

Volatility has lessened quite dramatically recently (with the one exception being the few days before and after the Brexit vote). Again, the major market mover is earnings. But beyond that, going into the last quarter there were also three issues that had many investors and money managers on edge: where interest rates were headed, what the Brexit vote result would be and, of course, what the political landscape in the U.S. would look like after the November general election. Two of those three issues are no longer the focus they were just a short time ago.

Of the three issues just mentioned, the U.S. election remains. It has been and will continue to be a very interesting process to watch. It would not be that surprising if, whatever the result, market reaction is muted. Perhaps more important over the near to medium term is the global fallout from the Brexit vote, both in terms of how that event alone will change things globally, and perhaps more importantly whether more EU nations will consider taking the same course. The second half of 2016 will be very interesting.