How Brexit May Impact the Market and Your Clients

On June 24, many Americans woke up to the surprising result that voters in the United Kingdom decided the country should leave the European Union—a move dubbed “Brexit.”

Markets around the globe fell, including U.S. markets.

Tim Barron, chief investment officer with Segal Rogerscasey, who is based in Chicago, tells PLANSPONSOR world events like this affect U.S. markets because it creates greater uncertainty among investors, and uncertainty usually creates negative volatility in the markets.

Investors might turn to cash and Treasury investments, feeling that if the European Union (EU) melts down, this provides safety. He explains that dollar strengthening can be bad for the economy because goods and services that are sold overseas will be more expensive. “This event is a good example of how global economies are interconnected,” Barron says.

News reports say the divorce of the UK from the EU could take up to two years. Barron says it’s hard to make a market call for what happens over the next two years. For the UK itself, there will end up being standalone traded agreements with countries deeply engaged and involved in the EU, Barron speculates. “The precedent is for the UK to have a vibrant relationship with the EU,” he says.

But, there are other unknowns that may create additional market volatility. According to Barron, there are other countries in the Eurozone that do not view the EU favorably. “What about Spain and the Netherlands?” he queries. “It’s not so much the two year period of figuring out trade agreements and other details that will affect the market, but it’s the fact there could be other substantive changes in the makeup of the EU.”

Another consideration is the response of the EU itself. “Brussels cannot be happy with the UK. How will they deal with other nations that have concerns? They need to have a policy response,” Barron says.

Retirement plan investors need to realize that equity markets go up and down, Barron says. Often, participants in defined contribution (DC) plans see investments go up and think that is the time to buy them, but when stocks go down, that is the time to buy. For DC plans, participants read, see and hear that stocks are plummeting and that creates great fear and concern. “It’s about communicating,” Barron says.

Multi-asset portfolios, such as target-date funds, are designed to help employees manage through complexity and change in the markets. For those participants who manage their own portfolios, sponsors should communicate that they need to manage their portfolios with their risk tolerance, goals and savings targets in mind.

“We are reaching out to our clients and pointing out that over the long term, the world survives. These short-term events don’t last, so don’t speculate on outcomes that are completely unknown,” Barron says.

For defined benefit (DB) plans, he suggests that if it’s been a while since plan sponsors looked at funded status and strategic asset allocation, now is time to do so. “Set it and forget it is not a best practice. They need to ask if there strategy still makes sense for them.”

Barron adds, “We frankly think this is not the end of the world, but when sponsors get a peek at something that could have a dramatic effect, that is a time to pull a committee together and review investing strategies.

Diversification doesn’t work all the time, but works a lot of the time, according to Barron. He suggests plan sponsors look at their investments and see how much diversification they have. Look at hard assets and assets generally uncorrelated with market swings.

Following news of the Brexit vote, several investment industry firms issued commentary.

A market update from MainStay Investments, a New York Life company, says, “Since the markets can be unpredictable, it remains important to construct your portfolio to withstand multiple scenarios. Therefore, diversification continues to play a vital role. Allocations should made to stocks, bonds, and other asset classes that are not always correlated to one another.

Charles Reinhard, head of portfolio strategy at MainStay Investments, who authored the market update, says, “Currencies can be hard to predict. In the 30-, 60-, and 90-days leading up to the Brexit vote, the British pound appreciated and depreciated approximately 50% of the trading days against the euro and U.S. dollar. The same can be said for the euro against the U.S. dollar. For many, we believe a 50% currency hedge on international equity exposures represents a thoughtful way to manage these ups and downs.”

A press release from Cerulli Associates says a concern is that Britain will lose its status as a major European funds hub. “This concern is ill-founded. As the largest retail funds market in Europe and the most attractive in terms of DC opportunities, Britain will continue to attract interest from foreign players wishing to expand their footprint in Europe,” the announcement says.

Nigel Green, founder and CEO of deVere Group, says there are three things investors should remember:

• Keep calm and carry on. Hasty decisions are typically not the wisest ones. There remains too much uncertainty around at the moment to take strong bets on any particular asset class, sector or region.
• Focus on the longer term. Yes, the political landscape has changed overnight, but your financial objectives have not.
• Keep an eye on other important geopolitical factors that will influence markets and therefore impact your investment decisions. These include China’s economic growth, the possibility of Brexit contagion as other countries seek to exit the EU, the U.S. election, the failure of negative interest rates in Japan and the Eurozone to stimulate sustainable recovery, and the Fed’s nervousness over the U.S. economy.