What's On Tap..

A Brexit Surprise: Contagion Ahead?

Last week, British voters surprised the world with their decision to leave the European Union (EU). What started as a conciliatory election promise by Prime Minister David Cameron quickly grew into a close and divisive campaign. Leave proponents highlighted the perceived dangers of immigrants coming into Britain and what they saw as restraints on British bureaucratic freedom imposed by EU leadership. Remain supporters sought to convey that the EU afforded Britons programs and benefits that a lone United Kingdom could not support. Deepening the shock, Cameron announced his resignation the morning after the referendum.

The short-term financial ramifications were immediate. The pound dropped 10% when markets opened on Friday:

The turmoil spread to equities as well, where banks were hit hard:

Global interest rates plunged, sending the U.S. 10-year treasury yield to fresh lows near levels last seen in 2012, and the German 10-year yield into negative territory:

The Tactical Edge

With valuations pushing even lower across the international spectrum, it is tempting to invest money into this space. We remain optimistic that international equities are poised to outperform U.S. counterparts over the coming years. However, our rigorous discipline to the quantitative approach has pointed us away from international and toward areas of the market that have been relatively strong. In particular, we have been tactically overweight domestic vs. international – and specifically allocated to equity REITs, utilities, consumer staples, as well as bonds of all type.

While 2015 was a difficult year for tactical strategies – largely due to the magnitude of the peak-to-trough swings – 2016 has brought about a recovery in this space following the Brexit. Our Global Tactical Balanced strategy had no exposure to European equities and instead favored the aforementioned domestic sectors. This helped to push the strategy roughly 3.0% ahead of the benchmark for the month of June.

Returns for a few major indices through the end of May indicate caution in the short term – quant models typically look for some sign of relative outperformance before engaging:

Our quantitative process looks across an extensive pool of global asset classes using a variety of measures seeking relative strength trends. Discipline to a rigorous quantitative process can help steer investors away from toxic areas of the market. This is true especially during periods of elevated volatility when emotions run high as we saw in the days following the Brexit referendum. 


William Royer,   Portfolio Manager / Associate Vice President

William Royer, Portfolio Manager / Associate Vice President


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