Brexit, Not Our Problem, as Q3 Begins

By K. Sean Clark, CFA

Trading across asset classes was dominated in the second quarter by the market’s view of Brexit.

When polls showed that Brexit was likely, risk assets sold off. When the polls showed it looked as if Britain would stay in the European Union (EU), risk assets rallied. Risk assets did rally hard up until the June 23 vote in which the United Kingdom (U.K.) voted to leave the European Union after more than four decades.

The stunning rejection of the continent’s postwar political and economic order sent shock waves around global markets. The vote to exit sets the U.K. up for bitter divorce talks with the EU, which potentially could drag on for years and tip the country a step closer to recession. But we expect it to have very little impact on the U.S., other than through its impact on the financial markets.

The vote sparked a global sell-off and sent the U.K. spiraling into a political crisis. David Cameron resigned as Prime Minister, the British pound plunged to the lowest since 1985, stocks tumbled around the globe, and U.S. Treasuries surged, sending the 10-year U.S. Treasury yield below 1.40%. The benchmark U.S. 10-year Treasury note yield ended the second quarter at 1.49%, just a shade above the all-time closing low of 1.38% struck in July of 2012.

SEE MORE: Is Your Client a Modern-Day Sisyphus? 3 Ways to End the Vicious Cycle

The vote to leave the EU was a stunner and initially the markets sold off sharply for two days. However, an interesting thing happened. After two days of global market sell-off, the markets recouped almost all of the losses over the next several days into the end of the quarter. It is interesting that after the initial shock of the vote, both risk-off and risk-on asset classes rallied.

Second Quarter Attribution

The Fixed Income Total Return (FITR) portfolio remained fully invested in high yield for the duration of the quarter, withstanding the brief spell of volatility surrounding the Brexit vote. For the quarter, the Fixed Incom e Total Return portfolio rose 4.85% gross of fees (4.08% net). Year-to-date the portfolio has gained 11.54% (9.91% net), outperforming both of its benchmarks. The strategy’s strong returns were primarily driven by the asset class decisions.