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  • Sharp Asset Management

Brexit – Shooting yourself in the foot


June 23rd, 2016 voters in the UK surprised financial markets by voting to leave the EU. The final result was 51.9% Leave to 48.1% Remain. Adding to the shock was the resignation announcement from Prime Minister David Cameron effective in October. Where does the UK go from here? The decision to leave the EU will now lead to a 2-year period of negotiations with the EU and finding a new Prime Minster that can develop a course of action with the split from the EU.

Economic Impact

  • Slower growth in the EU and UK although currency declines will cushion the blow.

  • Monetary policy to remain highly accommodative; potential rate cut in the UK.

  • Export activity and business investment in the UK to slow; UK trade with EU is 45% of their total trade.

  • Banking activity to shift from London to France or Germany over the next few years- loss of high paying jobs.

  • Limited impact to North American GDP growth as trade with the UK represents only 3% of total trade of Canada and US.

  • US dollar-a safe haven, to rise.

  • Canadian dollar--downward pressure due to strength in US dollar.

  • US and Canadian corporate profits for exporting companies will shift down slightly however, the UK accounts for only a small share of North American trade.

  • Fed on hold until September at the earliest.

  • Bank of Canada on hold until 2017 or later.

  • Canadian bond yields to remain at low levels to year end or longer.

  • Small negative impact on oil price due to slower growth in EU, UK and strength in the US dollar.

  • GDP growth in Canada and US down slightly.

Strategy for Portfolio

  • Your portfolio has very low exposure to the EU and UK, mostly through Canadian companies with foreign operations

  • Maintain stocks as our preferred asset class, look for opportunities to touch up positions

  • High dividend yield support.

  • Moderate economic growth over the next 2 years.

  • Corporate profits to expand slowly.

  • Quality companies will use this period of volatility to acquire assets.

  • Continue to emphasize high quality mid-term bonds.

The Bottom Line

  • The triumph of the “Leave” voters caught capital markets by surprise.

  • The sell off on Friday was significant however, stock markets and bond yields were up overall during the first four days of last week.

  • The uncertainty caused by Brexit will have a negative impact on business confidence in the short term; longer term there could be a slowing in global trade depending on how Brexit is negotiated.

  • Brexit is another development that supports the slow growth, low inflation environment that has been in place since the financial crisis.

  • Emphasizing quality assets remains of the utmost importance.

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