BREXIT Observations

By Retz Reeves, CFA

I thought it was the French who were going to ruin our 25th anniversary celebration in Switzerland.
In January, I bought tickets through Paris to Zurich and Swiss rail passes, and for six months I poured over Trip Advisor hotel reviews, bugged friends for restaurant advice and explored chocolate, cheese and wine tours. In addition to Zurich, I planned visits to Sargans, Lucerne, Lausanne, Vevey and Montreux.

I wasn’t particularly worried when I read about striking French railway and municipal workers; we were just passing through Charles de Gaulle Airport, after all. Unfortunately, just weeks before our vacation and the start of Euro 2016, other transport workers and pilots announced their intent to strike. I spent hours looking for alternatives by plane and rail. Luckily, the strike ended two days before takeoff.

It was a great week, touring Zurich and Lucerne, visiting wineries in Maienfeld and Lavaux, ascending the Jungfrau summit, exploring cheese making in Gruyère and riding the chocolate train to Broc. Throughout this great vacation, I kept up on the news regarding Brexit – the referendum whereby British citizens were voting as to whether to stay or leave the European Union. The vote looked close, but by evening of June 23rd, it was looking like the UK was going to stay.

The UK bookies made money – the odds were 60% “in” versus 40% “out;” but as I found out the next morning, the citizens voted for Brexit. The reasons cited for the “out” vote included concerns over immigration, jobs, refugees, trade protections, EU payments and loss of identity.

Subsequently the prime minister, Cameron, announced his resignation to take effect in October. There was speculation about a referendum to reverse the decision, but this appears highly unlikely, and it is expected that after many negotiations, and circa two years, the UK will leave the EU.

In the meantime, Scotland threatened to hold a referendum to leave the UK – the last one was unsuccessful, and it is likely that another one will have the same result. Slightly more possible is that other peripheral countries could exit the EU, putting pressure on the viability of the euro. Disbanding the currency would be a disaster, and EU officials met over the weekend to do see what they can do could to avoid this situation.

There will be real economic loss with Brexit – probably costs will go up, trade will be more difficult, tourism will suffer, labor will be less efficiently allocated as will other assets such as money and investments. This will not just effect European assets but also any country that trades with Europe and any company that does business in Europe, including the US and US companies.

George Osborne, Britain’s treasury chief, acted quickly to calm fears – noting that their financial institutions and economy are in better shape than the financial crisis of 2008, but he could not rule out the potential for a UK recession.

Global markets were not happy with Brexit and potential future financial disruption, markets fell and the strengthening dollar eroded gains achieved this year in our international portfolios.

While checking out of our Lausanne hotel, the receptionist informed us that French air traffic controllers were going on strike and she sincerely hoped we would make it back home safely; and actually, we did – proving that it wasn’t France, but Britain, that I had to worry about this trip.

The markets have remained volatile but, along with the markets our international Folios have regained some ground this week. Year-to-date (6/29/2016) Frigate is estimated to have a net return of -1.45%; Treasure Harbor, +3.48% and Yellowtail, +.36%.

The European companies I met with in March shared little details on their preparation for a potential Brexit. Although many of the ramifications still won’t be known, I suspect that during the upcoming half-year reporting season, managements will give us more insight into their earnings outlook and strategies. This may lead to changes in some positions in the Folios, especially since cash has accrued in many of their respective models, and we may find some interesting opportunities.

I will provide updates on the complexion and performance of our international Folios in the fall, but please don’t hesitate to write or call with questions. In the meantime, thank you for investing alongside Cale and myself.

About Retz Reeves

Portfolio Manager of the Frigate and Treasure Harbor Folios.
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