The strong run by European markets, as well as other markets in general, leading to the Brexit Referendum that occurred on the 23rd of June, reflected that market consensus was for a vote to remain in the European Union.

From a pure capital markets perspective, the vote by Britain to leave the European Union is therefore a negative surprise, markets were not expecting this, or rather markets preferred for Britain to remain. The market got this one wrong, and hence we expect some reversal of recent market gains, which will see many markets pull back.

However, we think that, even this expectation of a broad based pull back across global capital markets is not in any way a guarantee / one way bet, as no one knows at this stage, what the policy response to this big political event is going to be. The Bank of England as an example, communicated prior to the referendum that they would do whatever was necessary to ensure both financial stability as well as economic stability post the vote. This is not an environment in which any policy maker is going to take un-necessary chances. The recent decision by the FED to keep rates on hold confirms this. We are thus carefully monitoring all policy responses to allow us to understand how all this will pan out going forward.

Furthermore, the exit process itself, should it be confirmed which it needs to be, is a very complex and highly technical process that can take up to 10 years to implement. The rules around the exit are so complex as they were designed to discourage a breakup of the Euro Zone and how this is actually going to occur will only become clear within the next year or so. Exiting the Euro Zone is not an immediate process. So much must still happen.

Despite this exit process complexity, just as it was extremely difficult to predict the outcome of this referendum, it is going to be equally difficult to ascertain the impact of this outcome on both the British Economy as well as the global economy. This will certainly exacerbate the prevailing levels of uncertainty across the globe.

What does this mean for BIP’s Houseview Investment Strategy?

(The below refers to potential portfolio actions where clients follow the BIP asset allocation Houseview. For clients like yourselves who follow an approach of investing predominantly in Balanced Managers we will monitor the actions of the underlying managers closely)

• Volatility across capital markets is going to flare up over the short term, likely the next 3months to 12months.
• When volatility is so high, it means the potential outcomes, both positive and negative, are so wide that anything can happen. It means to us : Don’t do anything unless you are extremely sure the outcome will be in your favor, or you will regret it so dearly.

For example, now that we know about BREXIT, should we reduce exposure to Europe and increase exposure to the US? Or should we have done this last quarter?

• But is the US a safe haven? What is the outcome of the upcoming US election going to be? Hillary Clinton or Donald Trump? How is this going to affect the US dollar, the US economy, the US capital markets and the rest of the world?
  • Is Japan therefore the safer developed market?
  • Or maybe it’s China as they currently have the most fiscal and monetary resources than any other country in the world today?
  • Will gold prices rally further? Should we thus buy more gold?
  • Or maybe the current recovery in oil prices will persist? Or be derailed?
  • Will bonds rally as usually occurs during times of economic growth uncertainty and fear?

• Will the rand weaken and buffer our offshore losses as typically occurs in a risk-off environment?

These questions, maybe prove to us that BREXIT was not and is still not the only risk factor to worry about in today’s environment. So the big picture view of all looming risks today must not be abandoned – the environment is still broadly harsh and we remain convinced that only carefully considered diversification can save our portfolios.

We therefore caution that panicking in this environment of uncertainty can be the worst thing one can do and often destroys capital permanently.

• We have already positioned our portfolios for a wide range of risks by running highly diversified strategies. For example, while our direct European exposure will likely pull back, our allocation to gold is currently rallying strongly – up by 12% in rand terms since last night already, thus offsetting some of these losses. This coupled with our 10% underweight allocation to equities and 5 underweight allocation to property, across all of our mandates should go a long way in providing stability within our strategies and thus allowing us to remain calm and VALUATION FOCUSED. In the short term, losses will occur, albeit not permanent losses.
• This valuation focus means that we are going to deploy our current 15% low risk buffer into equities and or property, if we have a sell off that opens up any attractive valuations across our universe of 40 different investment ideas.

We remind ourselves: Stay calm – investing was never designed to be easy nor a short term activity.

Wealth creation and wealth preservation is a long term and highly challenging activity.

Boutique Investment Partners (BCI) Preliminary Communication – BREXIT