The recent Brexit vote in favor of the U.K. leaving the eurozone in June of this year caught many market participants by surprise. Developed equity markets immediately see-sawed down, then back up almost as fast, as safe haven assets like 10-year U.S. Treasuries rallied strongly.

Amid this extremely volatile backdrop, our global strategist team released their quarterly outlook report earlier this month, which helps to guide the firm’s multi-asset investment portfolios and services. This quarter’s report focused on the Brexit vote’s potential impact on portfolios. In a nutshell, they reiterated that such volatility in the otherwise lackluster market environment of 2016, given relatively expensive valuations across many asset classes, creates opportunity.

That’s how our multi-asset portfolio management team sees it too.

In many of our multi-asset portfolios, we faced some immediate headwinds from our overweight to the Europe ex-UK segment of the global market. However, these headwinds were more than offset by other positions in these portfolios – in particular, lower beta exposure overall; our use of options protection strategies on our U.S. equity exposure; strong performance from a deep value global equity assignment; and our overweight to the U.S. dollar relative to the Australian dollar.

Focusing on options protection strategies as an example to show how such volatility can present opportunities: About a week in advance of the ‘Brexit’ vote, when bearish sentiment had spiked, a nimble multi-asset investor could have sold out of the money puts on the Euro Stoxx 50®, collect a premium, in effect adding to their European equity position in a risk-adjusted manner. That is, if markets were to sell off further, buying European equities also would have coincided with our strategists’ ‘buy the dips’ strategy recommendation as outlined in their quarterly report.

The ‘Design’ element of our investment process, which encompasses our long-term strategic asset allocation across a diverse set of asset classes, certainly can help mitigate downside risk in absolute terms. That said, over the past year, it’s the ‘Construct’ (manager excess return) and ‘Manage’ (tactical positioning) parts of our investment process that have added the most value in relative terms.

Moving into the third quarter, in consideration of Brexit-related volatility, we remain defensive with the following general framework:

  1. Not ready to increase risk meaningfully, but potential buyers of EMEA ex-UK equities if markets continue to fall.
  2. Monitor as the dust settles to adjust risk exposures elsewhere in the portfolios – for example, in weights of managers and re-casting of aggregate portfolio exposure to ensure no unintended factor, geography, or currency exposures.

Our approach on positioning concurs with our strategists’ views stated in their quarterly report, in which they discuss how Brexit has downgraded their business cycle outlook for the UK and Europe.

They also write in the report: “It’s not all bad news: Europe’s economy had been improving, the currency declines will provide support, and equity market valuations are reasonable in both regions. The implications of Brexit will take months to work through, so more volatility seems likely.”

And, in our view, perhaps more opportunities for nimble investors.

For our strategists’ latest forecast, see the 2016 Global Market Outlook- Q3 Update.

Disclosures

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

Investing involves risk and principal loss is possible.

Forecasting is inherently uncertain and may be incorrect. It is not representative of a projection of the stock market, or of any specific investment.

Diversification does not assure a profit and does not protect against loss in declining markets.

Investments in non-U.S. markets can involve risks of currency fluctuation, political and economic instability, different accounting standards and foreign taxation.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

The EURO STOXX 50® Index, Europe's leading Blue-chip index for the eurozone, provides a Blue-chip representation of supersector leaders in the eurozone. The index covers 50 stocks from 12 eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.STOXX and its owners do not make any warranties or representations, express or implied, with respect to the timeliness, sequence, accuracy, completeness, currentness, merchantability, quality or fitness for any particular purpose of its index data. STOXX and its owners are not providing investment advice through the publication of indices or in connection therewith. In particular, the inclusion of a company in an index, its weighting, or the exclusion of a company from an index, does not in any way reflect an opinion of STOXX or its owners on the merits of that company. Financial instruments based on the STOXX®, DAX® or SMI® indices are in no way sponsored, endorsed, sold or promoted by STOXX or its owners.

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