How a UK Advisor, Strategist Handled Brexit

“That’s a narrow majority,” said Bailey, and the vote could easily have gone the other way, many thought. “Really, you could argue that the U.K. scored its own goal,” the strategist explained, drawing an analogy to when a team scores a point in the area guarded by its own goalie, which gives the opponent a point. “With the uncertainty, economic growth could be lower for a year or two, the Bank of England might cut rates sooner rather later, there’s turmoil in the government … and it’s reinvigorated the Scottish independent campaign.”

The pro-leave voters believe “the modern economy had not done them many favors,” he added. But, ironically, it is the average voter who may have supported Brexit that “will be most directly impacted” by it in negative ways.

Asked if there are any investment or other lessons to be learned from the situation, Bailey says “trying to hedge is very difficult to do,” given the associated costs, “and moving into government securities only can also be an expensive solution.”

Plus, if things “go the wrong way and you’ve sold a large part of a portfolio … you are then looking at buying [investments] back at higher prices,” he explains. Instead, the strategist tells investors “to accept the pain and take a medium-term view.”

Investors may want to consider options such as moving more funds into corporate bonds, securitized loans or utilities, since such investments are more protected from events like Brexit. “The returns are likely 3 to 5% with other risks involved, though, and they can have less liquidity.”

In other words, “Alternative approaches exist, but they come at a price. Portfolios that work [well] in all situations do not exist,” he explained. “We tell clients, that with an unexpected event, politicians and central bankers react … step in with liquidity or make … [other] changes.”

Though “black swan” events happen, “The outcomes often are not as bad as expected,” Bailey said, “and that is what is happening now.”

For his part, Hunt plans to closely watch corporate investments trends during the next earnings-reporting cycle, set to start in July. “That is the critical element,” the wealth manager explained.

Corporate investments are “nearly certain to slow,” he adds, “but by how much? And how will the government respond? It may have to prop up the economy.”

— Check out After Brexit Vote, Is ‘Stay the Course’ Really the Best Advice? on ThinkAdvisor.