Independent Thinking®
Beyond Brexit
July 1, 2016
What does Brexit mean to private investors in the United States? Not quite as much as the media may suggest, at least not in the near term.
Brexit will take years to negotiate. It’s worth remembering, too, that Britain was a latecomer to the European Union and never adopted the euro. It may be that the country remains actively engaged in a reasonably cohesive Europe, as are Switzerland and Norway.
We should, however, expect continued uncertainty in the markets and further slowing of economic growth, around the globe and in the United States. The bigger fear is that the growing (and far more extreme) populist movements in France and other countries will grow and that the European Union will start to unravel. But we lowered our capital market return assumptions one year ago and remain confident that our expectations are reasonable in light of current market conditions.
We also expect the dollar to remain strong against other currencies, which has it pluses for American consumers but puts pressure on American exporters, corporate earnings, and on the already excessive amount of dollar-denominated debts in emerging markets. These problems will be significantly exacerbated if China devalues its own currency as a result of the strong dollar.
European banks, already weak, now face additional challenges. In contrast, U.S. banks are in good shape. The Federal Reserve recently released the results of its severe stress test, and the biggest U.S. banks passed with flying colors.
In short, we continue to invest with confidence and believe the United States is in relatively good shape, and do not expect a recession any time soon. We remain underweight in international equities in general and significantly underweight in international developed markets, including Europe. We see opportunity now in the U.S. stock market. We have no exposure to foreign currency denominated bonds. Our defensive assets are generating positive returns and adding stability to portfolios in these volatile market conditions.
John Apruzzese is the Chief Investment Officer at Evercore Wealth Management. He can be contacted at [email protected].