Brexit vote whipsaws markets, tests financial advisers' resolve

The fallout could last at least two years

Jun 24, 2016 @ 12:39 pm

By Jeff Benjamin

The global stock market selloff Friday following the United Kingdom's vote to leave the European Union proved that the financial markets largely believed Britain was going to vote for the status quo.

While many financial advisers and market analysts saw the initial market pullback as a keen buying opportunity, the fallout from the historic Brexit vote could linger for a couple of years as the details get sorted out.

“For U.S. investors, this means uncertainty for European investments in general and U.K. investments in particular,” said Chris Chen, wealth strategist at Insight Financial Strategists.

As Mr. Chen pointed out, the U.K. will have two years to fully depart from the European Union that it has been a part of since 1973, and the transition should generally favor the rest of Europe over the U.K.

“Europe comes out a little bit ahead because more jobs will flow from Britain to the rest of Europe,” he said. “Leading up to the vote, the markets were priced assuming they would stay in the EU, but because I'm a long-term investor my clients are going to be okay because I think everything will right itself in the long term.”

Doug Cote, chief investment strategist at Voya Financial, said the volatility in the wake of the vote might have been compounded by the news coming out on a Friday, which meant more investors would want to head for safety prior to a weekend full of meetings and hand-wringing over what comes next.

“Investors don't want to have to worry about it all weekend, because a lot of fear can build,” he said. “Of course, it could be a good thing too, because maybe investors can use the weekend to calm down.”

WHIPSAWED

Despite the market's volatile reaction on Friday, including seeing U.S. stocks close down 3.4%, calm is what most advisers are promoting in the wake of the Brexit vote.

“I'm counseling investors to stick to your plan on this historic Brexit vote, because changing now after the fact is what I call the folly of gaming divarication,” Mr. Cote said. “Investors risk getting whipsawed if change at this point.”

While the vote could hardly be defined as an unexpected “black swan” event, because it could only have gone one of two ways and it was considered a toss up to the very end, the financial markets clearly expected Britain to favor staying put.

“It was a surprise to the markets because the markets were pricing in a 'remain' vote, and the markets don't like uncertainty,” said Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ.

“At this point, the market selloff is either a buying opportunity or a reason to do nothing,” he added. “It's historically been better to buy then to bail. The market will recover, but it takes time for it to recover, so being in is better than being out and trying to time it.”

Financial advisers, in general, had been paying close attention to the unfolding scenario leading up to the historic Brexit vote, and some even factored it into their portfolio strategies.

“Seven days before the vote we cut our international exposure down to 10%, and we plan to keep it that way for the remainder of the year,” said Jon Ulin, managing principal at Ulin & Co. Wealth Management.

“It is a little bit of market timing, but it was obvious to me it could be a big dip in the markets,” he added. “There seemed to be a strong chance this was going to happen.”

WIREHOUSES

Wells Fargo Investment Institute, the registered investment advisory arm of the bank's wealth and investment management division, is recommending frequent balancing, bringing portfolio allocations in line with strategic objectives while adding and trimming allocation to exploit price drops as entry points for favorable investments.

“General market uncertainty and the volatility it brings are likely to favor U.S. stocks, while developed and emerging-market stocks are expected to face downward pressure in the near future,” Wells Fargo Investment Institute's head global market strategist Paul Christopher and research analyst Peter Donisanu said in a research note Friday.

UBS Group AG also is encouraging investors not to abandon their long-term strategies or sell down risky assets in the heightened market volatility.

“We would look to global policy makers and central bankers to issue statements over the coming hours and days,” Mark Haefele, the global chief investment officer of UBS' wealth management business said in a note Friday. “There is a strong likelihood of coordinated central bank action to support liquidity.”

With reporting by Christine Idzelis.

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