With the United Kingdom voting last night to exit the European Union, the world markets reacted very negatively today. Our portfolio, with a heavy weighting to inexpensive/high dividend investments, was down less than half that of the S&P 500. Our primary actions today were to (1) sell our gold/gold miners (GDX, NEM) into strength and (2) to raise some cash without a net change in exposure to the S&P.
The vote was not a financial crisis – it was the result of a political crisis. The British, like many others globally, simply rejected the political elites and voted for democracy and self-rule. It is important to understand the exit is not immediate, but could take up to two years. Since Britain never adopted the Euro, there will be no currency change.
We believe investors should ignore the scare stories (they sell newspapers and television commercials). One such scare story is that Europe may respond with a tit-for-tat decision. This story was fueled by European Commission President Jean-Claude Juncker this morning when he suggested that Europe “kick-out” Great Britain “sooner rather than later”. Jean-Claude must be mathematically challenged, or he is willing to promote his job at the European population’s expense. The simple math is that Europe runs a trade surplus with Britain. The EU would be more harmed by his suggestion. Germany will make sure that does not happen. They will not allow one of their biggest export markets to be chased away. They will insist on a free-trade deal with Britain, or Jean-Claude may be headed to the guillotine (or beheaded by one).
This could actually help the US exporters in getting a free-trade deal signed with the UK – one that the EU has been holding up.
We expect the market volatility will be short-lived and will provide some buying opportunities. Brexit is not a reason to sell. In fact, freedom and self-rule are good things.