Dear Clients,
The UK’s vote to exit the European Union came as a shock to nearly all observers. Polls had it narrowly favoring a “yes” vote to remain in the EU, stock markets around the world had rallied on the belief that the vote would go in favor of staying. According to, as late as 6:22 pm eastern time (11:22 pm in London) the prediction markets (read betting markets) had the odds of a “No” vote at only 12%..Yet all were wrong. Clearly anti-bureaucracy, anti-immigration sentiment ran deep.
The most feared impact is political contagion across Europe. Fringe parties in The Netherlands and France are already calling for their right to vote on remaining in the EU. The future of the Euro currency as well as the entire union now seems more tenuous. The vote increases the likelihood of a European recession as all the uncertainty affects business confidence and consumer confidence. Interestingly, the process to leave the union will take about two years so there will be continued negotiations and likely new treaties between Britain and the remaining members.
The likely consequences are continued central bank support for an already tepid global economic environment. This may take the form of more aggressive bond buying by the European Central Bank and delayed tightening of monetary policy in the U.S. Certainly more political upheaval will come as anti-immigration, anti-EU parties are emboldened. JP Morgan estimates that the UK’s economy will slow abruptly from an annualized pace of real GDP growth of around 1.6% to about 0.6% in the second half of 2016 and no better in 2017. The British Pound sold off in the aftermath of the vote to the lowest level versus the dollar in 30 years. The downward pressure on the currency will likely increase inflationary pressures in the UK.
In the US the consequences should be more muted. We have seen estimates of downward pressure on economic growth here of between 0.2% to 0.6%. Seemingly small numbers, but when we have only been growing about 2.0% annualized it may feel more significant. Some areas of the economy may actually fare better. For example, London is a major banking center and those banks may lose business to U.S. banks. This also may increase the view of the U.S. as a safe haven during these times of uncertainty.
History suggests that sudden shocks like this (the Mexican crisis in the mid 90’s, the Asian currency crisis in the late 90’s, the Greek crisis in 2011), can be volatile, but they also provide opportunities. We will do our best to seek sound investments to take advantage of the volatility as well as provide a buffer through sound portfolio structure and management.

Kenneth Frost, CFA
Executive Vice President and Chief Investment Officer