Friday, June 24, 2016

Brexit and its Social and Economical Impacts!!!

Finally, the United Kingdom has spoken. They want to get out of the European Union - first country to ever leave the EU experiment. Although the EU experiment had a lot of promise, it turned sour when wealthy countries had to bail-out others. While leaders were open to the idea, public clearly opposed it.

Flow of Events going forward:

  1. UK's exit will now call more countries to hold REFERENDUMS
  2. EU might be even more FRACTURED 
  3. TRADE will slow down
  4. Bad for the EU and consequently the GLOBAL ECONOMY 
  5. Poor economy will impact the STOCK MARKET
  6. Force central banks to infuse more liquidity into the system and hence, keeping the INTEREST RATES LOWER for an extended period of time.

All of this can be summarized into:

  • Stocks --> Lower
  • Bonds --> Higher
  • Gold --> Higher
I wish this was one of those Black Swan events, which brought in panic selling and then markets continued on their merry way. However, our Stock Market Bear Case analysis shows that the trend is about to turn lower. We have been out of stocks since last August (2015), with short allocation in Jan, Feb and March.

Now nothing goes straight down. So its possible that after 2-3 days of panic selling, we might see a relief rally into Q2 earnings. But earnings and all the estimates will be adjusted due to Brexit vote and hence, markets will have a lot of reasons to decline. We will keep evaluating the developing market conditions and share insights.

Under these circumstances, we are keeping our strategic allocation in the portfolio (YTD results till last week). Will share latest results over the weekend. The portfolio is totally uncorrelated to the stock market, and as a result gives a lot of peace of mind, at time of market turbulence.

In the next post, we will discuss impact of Brexit on our social and retirement investing.


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