Brexit and your Portfolio

In November of 2008, I had the honor of placing my brother’s “pilot wings” upon him in Pensacola, Florida.  He is currently a Marine helicopter pilot.  Most people can remember what was going on in the world circa 2007-2008, especially in the world of finance.  After the ceremony, I had the privilege of sitting with my brother’s commanding officer, who happened to be a Southern-blooded war-tested high-ranking Marine.  He asked me what I did for a living, and I told him.  His eyes widened and he quickly gave me a look-over as if he was evaluating me for post-traumatic stress disorder.  After apparently determining that I was still of sound mind, a giant wry smile arose on his face as he leaned back in his chair.  His next two words left a permanent mark upon me. 

 “Ammo and Canned Tuna Fish.”  

 My reply, “What???”

 “All I really need to survive and protect my family is Ammo and Canned Tuna Fish…..and I got a whole lot of both of them in my basement!”  

We all had a good laugh together, but I’ve thought about that nice Southern gentleman many times since then. 

Last night the British people decided that they no longer wanted to be a part of the European Union.  World markets are reeling this morning.  Do we believe this is a time for Ammo and Canned Tuna Fish???   NO 

  The next few days could be choppy, but we believe this will be short-lived.  A few additional facts for you:

  • Roughly a month ago, we took defensive steps to make all client portfolios more conservative.  Everyone has 10-15% more in cash, bonds and alternative hedge funds than normal.
  • We do not have any direct exposure to European or British stocks or currencies.  We have two global mutual funds, which have small exposures to each, so there is some indirect exposure but it is minimal.  We’ve calculated that our average client portfolio has less than 2% exposure to European stocks and less than 1.25% exposure to British stocks through the global mutual funds.

Why do we believe this will be short-lived? 

Most big institutions and traders called the election wrong and positioned trades for a “Remain” vote.  Those trades have to be unwound very quickly, and those using leverage likely suffered margin calls.  If they do not have the cash to cover the margin debt, they have to sell some other securities to meet the margin obligation.  It will likely take more than a day for these trades to unwind, so this may continue into early next week.  Then rationale should return to the world and markets should stabilize.

This is not the first time in history a country has left a trade union.  It has happened many times before, and we’re still here!  It will take six months to two years for the British government and corporations to redraft trade agreements and immigration policies with its European neighbors and during that time, British GDP will likely stagnate.  A mild recession there is probable, but they will survive and likely come out stronger than before.  It appears as though they may start to look more like Norway, who is not a member of the European monetary or trade union.   But Norway is doing just fine…

 What are we doing now with your portfolios, and what are we watching?

Sometimes the hardest thing to do in investing is to ‘do nothing’.  But that is what we are doing today.   We believe our portfolios are well-positioned for this, and do not feel the need to sell more in a panic.  And furthermore, since we believe this will be short-lived, we are doing nothing for the time being.  If things settle down next week, we will view this as a buying opportunity.

What would make us change our mind?

We think the biggest risk now is ‘contagion’, and that other countries may vote their way out of the EU.  If that happens, we may see the end of the European Union as we know it.  Should we see that occurring, we will take more steps to make the portfolios more conservative…..and possibly consider buying some Ammo and Canned Tuna Fish.  

Ken Watten, MBA, CFP®

Kaye Capital Management