From Euclid Advisors’ international investment team
With regard to the Brexit vote, despite the best prognostications from both pollsters and bookies, the “Leaves” of the UK were victorious in extricating themselves from the European Union (EU). In our opinion, the EU experiment may be on its way to dissolving. The UK is an hors d’oeuvre to the relentless stream of global elections over the next 12-24 months. Each will be an opportunity for the proletariat to signal its displeasure with the global elite over globalization, technology disruption, and migrant flows. The result will be unending political uncertainty which could serve to depress equity valuations, bond yields, and inflation expectations, with occasional policy-based eruptions in stock prices.
Because of these concerns, we think the one currency in the world not influenced by “beggar-thy-neighbor” central bank policies is gold. No country wants a strong currency in this slow-growth, sub-3% global GDP growth environment. If the U.S. dollar declines, U.S. manufacturers, emerging markets, and commodity producers are happy, but the Japanese and Europeans are not. If the dollar rallies, it represents global monetary tightening on $250 trillion of net global debt, strangling EM sovereigns who can least afford it, handicapping U.S. manufacturers, and raising the cost to global commodity consumers.
Defensive equity investing is something we have historically provided, and Friday was a nice proof point of this. As global markets sold off, we had strong relative performance. Our current positioning includes: 1) a bit more cash than normal going into Brexit (10% vs. 2-4%), 2) two gold mining names that we bought in the first quarter, and 3) a large underweight to European financials. These more top-down exposures surround a high quality, cash generative portfolio which is well positioned for the current global backdrop of slowing growth, low rates, and increased policy and political uncertainty.
All in all, we are a bit cautious here with one caveat: Brexit is not Lehman Brothers in 2008, if for no other reason than financial institutions are much better capitalized now than they were then.