A Note to Our Clients
June 24, 2016
The Sun Rose this Morning, It Will Rise Tomorrow.
- Common stock prices are under pressure this morning following a surprise vote in the United Kingdom to leave the European Union. All of the trading positions put on over the past week or so to benefit from a “Remain Vote” are being shaken out of the market. A resulting global margin call on leveraged investors is accentuating the decline. In a flight to safety, Treasury bond yields are falling and gold prices rising.
- From a fundamental perspective, the U.K. economy will suffer in the near term from a decline in business investment, a repositioning of financial services employees from London to Frankfort or Paris, and weaker purchasing power from the sharp decline in the British pound. However, the U.K. is the fifth largest economy in the world and it is very unlikely that Continental Europe will want to see a major export market become more distant. To help bridge the near term shock to the global financial system, central banks around the globe have committed to provide liquidity to the financial markets, particularly the foreign exchange markets.
- While the “Leave Vote” is weighing on investor sentiment today, it is unlikely to result in a change in the fundamental outlook for the U.S. economy and U.S. equities. We do not see a contagion occurring which negatively affects the domestic financial markets in a manner which will lead to a significant economic slowdown in the U.S. The main impacts domestically will be a stronger U.S. dollar, leading to slower U.S. exports and more modest inflationary pressures than otherwise. The Federal Reserve will need time to assess the evolving economic and financial market consequences from “Brexit” before making any additional rate adjustments. Yields on longer maturity Treasury securities should remain lower than otherwise, a positive for the housing market domestically.
- While the decision in the United Kingdom to leave the European Union will raise the regulatory and political volatility that will be harmful to economic growth worldwide, remember that negotiations for the U.K. to leave the European Union could take more than two years. We also expect that every effort will be made to make the transition of the U.K. out of the European Union as seamless as possible.
- We believe our investors are as well positioned to weather the near term volatility as reasonably possible. Our focus on high quality, dividend and distribution paying companies with large domestic footprints will benefit our clients. Our heavy concentrations in utility, telecom, and consumer staples companies is a great place to ride out the storm. With oil prices lower with the strength in the dollar, our pipeline investments will be a touch lower today. However, the high distribution yields these companies offer and their exclusively domestic orientation, combined with the record dates taking place next month, should offer investors an attractive entry point following the sharp rally in these securities over the past four months.
- In sum, the surprise vote in the United Kingdom to exit the European Union will have little impact on domestic growth, will keep rates and bond yields lower for longer, and will moderate inflationary pressures. The U.K decision is offering investors the second best opportunity to put money to work for long term investors this year, after the tremendous buying opportunity that took place on February 11. Our clients are well positioned to weather this storm and investors with liquidity have been given an opportunity to put money to work. Remember, the sun came up today and it will tomorrow.
Pierre G. Allard
Joseph T. Keating
Chief Investment Officer
The opinions and ideas expressed in the commentary are those of the individual making them and not necessarily those of CenterState Bank of Florida, N.A. The statistical information contained herein is obtained from sources deemed reliable, but the accuracy of such information cannot be guaranteed. Past performance is not predictive of future results.
CenterState Bank of Florida offers Investments through NBC Securities, Inc. (NBCS”). NBCS is a broker/dealer and a member FINRA and SIPC. Investment products offered through NBCS (1) are not FDIC insured, (2) are not obligations of or guaranteed by any bank, and (3) involve investment risk and could result in the possible loss of principal.