BREXIT What Does it Mean?

First we need to keep BREXIT in perspective. This is NOT a GREECE situation of 5 years ago and still running.

You may recall Greece was in a terrible financial situation. There was virtually a run on banks because people's fears were so out of control.

The Greece reasons were pretty basic:

  • That country's Government Debts were three times higher per capita than in Canada.

  • They had to keep borrowing to make ends meet and then creditors stopped wanting to lend them money.

  • In essence their economy was totally out of control.

  • A big part of this had to do with the underlying socialist approach and Union dominance and demands.

  • My recollection was PUBLIC Union members could retire at 50 with a full pension.

  • The rest of Europe was adamant that they wouldn't fund 50 year old retirement when the countries helping to Refinance Greece had age 65 or 67 retirement dates.

  • The Greek Government had let a huge underground economy work, meaning people and companies weren't paying taxes and the Government did nothing about it.

  • It was a series of dominoes all beginning to fall.

Back to the BREXIT:

Essentially there are trade benefits for Britain to being in the EU. Think of it as a free trade zone. Somewhat similar to the NA Free Trade Act. between us and the US.

There are no solvency issues to be concerned about in Britain. Their banks are in Excellent shape.

Employment is good but like many countries could be somewhat better. But there is nothing critical to worry about.

Britain pays about $12 Billion a year to be a member of the EU. This will eventually stop.

The only thing that is really in question is what will the trade barriers be between the UK and the remaining EU. This is the primary concern and nobody knows. They speak about higher unemployment but they're not sure.

Underlying all of this was a feeling that because of the EU, Britain was losing some of its autonomy and specifically around immigration.

Also remember Britain never adopted the EURO as its currency. So in that regard it is easier for them to exit than many others.

TIME FRAME:

It is expected that markets will be adapting, meaning both ups and down in the UK Market and around the world.

Generally the markets dislike uncertainty and they react negatively, if not overreact, to things they don't know.

There are a series of steps that need to take place before any official EU-UK divorce occurs.

  1. Britain has to pass legislation confirming they are leaving.

  2. They must then enter into negotiations with the EU on what it all means to actually split up. This is no small feat as from what I've heard there are over 60,000 clauses dealing with trade and interrelationships that need to be reviewed.

  3. There is a two year maximum timeline to actually exit. Meaning if they can't come to agreement on the exit you get booted out regardless.

THINGS TO REMEMBER:

The funds most clients have included a good portion of Balanced and Dividend funds.

The fundamental nature of these funds is to be conservative, be diversified and to protect investors.

Use this analogy, let's say you only had one horse in a race. If anything happened to that one horse it would be a problem.

Now imagine you had 10 horses in a race. Well they all wouldn't finish first but you would have a nice balance of faster and slower and your risk would be reduced.

This is what Balanced funds are about. They have numerous investment strategies inside each Fund. The fundamental purpose is to buffer any downturns. Minimizing volatility is the key while achieving solid ongoing returns.

Knowing most people are generally risk averse to varying degrees is why you have the Balanced Funds you do. Of course we can't take away all risks but we can help minimize them.

RECENT HISTORY:

Think about all of events that have happened in the last 5 or 6 years that caused market turmoil: Greece (initial and subsequent events), Wars in Afghanistan, Syria, Ukraine, Nuclear threats in North Korea, Egypt upheaval, and most importantly the OIL crisis.

During all of this time a good Balanced fund would have returned 5% or more on average per year.

The markets today are reacting because they don't know what it all means. The tendency is to overreact.

There is nothing fundamentally wrong in Britain financially.

This is a process of extracting themselves from the EU Partnership.

Really they are the first ones to do so and people are unsure what it all means. That's the bottom line.

Do I have concerns? Sure I do but mine are shorter term in nature.

Also keep in mind many funds don't invest all of the money they have been given. They often keep some money in cash and then use it at times like this to buy stocks when the value has dropped, like today. This is why we all pay fees to money managers to stay on top of all of this and make prudent decisions on behalf of all investors like you and me.

MARKET:

  • The TSX dropped by about 200 points today at the time of writing this article.

  • But guess what, yesterday it went up about 130 points on the expectation the UK would 'Remain' in the EU.

  • The net loss in two days was 70 points or 1/2 of 1%.

  • Oil Prices have had a 20 times bigger impact on the market than this initial BREXIT concern.

THE KEY TO SUCCESS:

  • Understand your Risk Profile as an investor.

  • Ensure your fund selection is in line with this profile.

  • Remember you are in the markets for the long haul and this and other issues will be on the horizon.

As for BREXIT, we'll be hearing about this for the next 2 to 3 years as each significant step in the Divorce is concluded.

I hope this update was helpful. Please feel free to forward to others.

Always know we are here to answer your questions and to meet with you as you require.


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