On June 23, Britain voted to leave the European Union (EU), a move that has spurred volatility in global markets. As a member of the EU, Britain abides by European regulations, contributes to the European budget, and benefits from trade agreements and free movement of EU citizens. The Brexit stemmed from a smaller group of indivuals and their frustration in having to comply with these regulations, causing other political causes to join with the intention of limiting immigration.
The first half of June was shaky as the market braced for the uncertainty of a vote. The flight to safety caused yields to drop, but in the days leading up to the vote, there was a strong consensus that the 'remains' would come out on top, and the risk-on mentality came back into the market. However, on June 23, it became apparent that the 'leaves' would win, causing bond yields to drop significantly along with global equity markets and European and UK currencies.
With global markets fluctuating significantly, and in a time as volatile as we've seen in the past month, it is important to highlight the benefits of maintaining a well-diversified portfolio. At Invisor, by spreading out our holdings across several markets and rebalancing between them, we can off-set a lot of the downside risk we have in any particular market, and maintain our exposure to the upside potential.
Going forward, we expect hightened levels of volatility as Britain and Europe come to a new trade agreement. Unless Britain can secure something solid, they will have to continue to contend with contracts being lost, movement of jobs, a possible referendum in Scotland, and a potentially more restrictive border between Northern Ireland and the Republic of Ireland. The EU has an incentive to levy stiffer penalties on Britain for leaving, as they do not want to incentivize existing members to see this as an option. Although the global economy will have to deal with this uncertainty, economic news over the past quarter has continued to remain solid in terms of manufacturing, home sales in the United States, and job growth.
As we saw in June, market fundamentals will continue to hold out as investors take advantage of mispricings and overreactions. This reminds us of the importance of staying steady in times of uncertainty, instead of selling when there are negative reactions, only to buy back when it's on its way back up. When we think of things from a long-term perspective, we're still in a risk-off mentality where there is a lot of cash on the sidelines. As we've said in the past, you want to be invested when this money finds its way back into the market.
Our message for long-term investors stays the same: stay invested, stick to your plan, and keep a well-diversified portfolio. It's going to help you in months like June when the market is volatile.
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