While polls were showing similar odds for Leave and Remain over the last weeks of the campaign, the market seemed to believe the Remain camp would prevail as reflected by the risk-on movement and GBP strengthening in the last week. As preliminary vote results arrived overnight on June 23 and Brexit vote was subsequently confirmed, the pound dropped to a 30-year low and a sharp risk-off market reaction gained momentum across assets, prompting central banks to step up.
We expect the uncertainty created by Brexit to continue to buffet the markets for a sustained period of time as the event has profound political and economic implications for the United Kingdom, Europe, and the world.
Our base case is that economic activity in the U.K. and Europe slows and that the U.K. domestic economy will be impaired.
During the first half of 2016 we broadly reduced our exposure to U.K. domestically exposed Consumer Discretionary companies (including auto-related, media, retail, leisure, and homebuilders) and U.K. Financials (insurance in particular). These adjustments were largely driven by company-specific fundamentals, valuation risk concerns and, to a lesser extent, Brexit risk considerations.
In anticipation of a close referendum outcome, we conducted a comprehensive review of our U.K. holdings across portfolios and analyzed the potential business impact of Brexit. Events are very fluid, and we are continuing to closely monitor developments. Our base case is that economic activity in the U.K. and Europe slows and that the U.K. domestic economy will be impaired. In this environment, we are attracted to companies that are more globally oriented, particularly those that derive significant portions of their revenues from the U.S.
We believe that we are well prepared to make adjustments, both defensively and opportunistically, as we deem appropriate in the context of our quality growth investment approach.
GICS Reclassification: Impact on Emerging Market Investors
