Brexit: The Dust Starts to Settle

by: , CEO, IndexIQ by MainStay Investments

Britain has a new prime minister, and the S&P 500 hits a new record high. Go figure!

While the aftermath of Brexit continues to be felt, it’s clearly reverberating in some unexpected ways. Stocks fell sharply after the vote, but have since rebounded both here and in Europe. The STOXX Europe 600, which fell 11% on the Brexit news, was down just 1.6% as of July 30th. The British pound is another story: its trajectory has been more consistently downward, at one point hitting a 30-year low. The euro has not fared too well, either. Volatility and a general sense of market unease have persisted as well.

There are (at least) two lessons to be learned from this. The first is the general unreliability of market prognostication. In the short run, no one can reliably predict how investors will react to events. The sell-off was sharp; the bounce back equally dramatic. The second is the need to continue to expect the unexpected, and to position your portfolio accordingly. Oddly, low probability events seem to be happening more and more frequently these days. That may say something about the times, or it may say something about the markets; but either way it’s worth keeping in mind.

For investors, liquid alternative funds can be used by those seeking to manage volatility, while currency-hedged funds can help address the potential shock of currency movements, which are often sudden and hard to predict. (We think 50% hedged is a good number.) There’s a sense that there are more shoes to drop post-Brexit. For trade agreements, market access, and the cross-border movement of people, the devil was always going to be in the details, and it will take time for those to emerge. There’s uncertainty, too, as to whether the UK vote is a one-off, or the start of a bigger unraveling for the EU. One thing does appear certain: the UK does appear likely to backtrack; Prime Minister Theresa May has loaded her cabinet with Brexit supporters and had declared her commitment to seeing it through.

Significantly in the US, post-Brexit uncertainty has caused the Fed to hold off on its campaign to lift interest rates, a positive for equities. The Bank of England, on the other hand, is generally expected to undertake its first rate cut in seven years later this summer. These moves may result in a further realignment in the currencies of the US, the UK, and the Eurozone, potentially dragging in the yuan and the yen as well.

We’re only a little more than a month into the post-Brexit era, so it’s early to draw any sweeping conclusions. Much will depend on the reaction of the EU and other EU members. With 4% of the global GDP, it’s unlikely that Brexit alone was ever sufficient to pull the global economy into recession. Still, it’s one more thing for investors to worry about, and one more reminder that we continue to steer our way through interesting, and unpredictable times.

Brexit is an industry term that refers to the June 23, 2016 referendum by British voters to exit the European Union. The S&P 500® Index is an unmanaged index considered representative of the U.S. stock market (performance data assumes reinvestment of dividends, but it does not reflect management fees, transaction costs, or other expenses). The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. The STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region.

About risk:

All investments are subject to risk and will fluctuate in value. Alternative investments are speculative, entail substantial risk, and are not suitable for all clients. Alternative investments are intended for experienced and sophisticated investors who are willing to bear the high economic risks of the investment. Investments in absolute-return strategies are not intended to outperform stocks and bonds during strong market rallies. Hedge funds and hedge fund of funds can be highly volatile, carry substantial fees, and involve complex tax structures. Investments in these types of funds involve a high degree of risk, including loss of entire capital.

The information and opinions contained herein are for general information use only. IndexIQ does not guarantee their accuracy or completeness, nor does IndexIQ assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are as of the date of this report and are subject to change without notice. Past performance is no guarantee of future results.

Consider the Funds’ investment objectives, risks, and charges and expenses carefully before investing. The prospectus and the statement of additional information include this and other relevant information about the Funds and are available by visiting IQetfs.com or calling 888-934-0777. Read the prospectus carefully before investing.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs and the principal underwriter of IQ Hedge Multi-Strategy Plus Fund. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, New Jersey 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

1703892

Adam Patti

CEO, IndexIQ by MainStay Investments

Adam is Chief Executive Officer and Founder of IndexIQ. Prior to founding IndexIQ, he led Fortune Indexes, a pioneer in the Exchange-Traded Fund (ETF) industry, having launched two ETFs back in 2000 in partnership with State Street Global Advisors

Full Bio

Leave a Reply

Your e-mail address will not be published.