Just when things seemed to be settling down, along came Brexit. Once again polls proved to be very wrong in predicting a win for the Remain side. Many market players were also wrong, positioning their portfolios based on a Remain win. In the ensuing panic to unwind positions, equity markets fell sharply, with the TSX falling 442 points in two days. Markets then rebounded, as it became clear that this was not a financial crisis like the one that occurred in 2008, but a longer term uncertainty with a number of potential outcomes.
It is clear that even the supposedly well - positioned and informed leaders of the Leave movement, including members of the U.K. Parliament, had not considered the ramifications of winning. There was the mistaken assumption that the E.U. would allow continued access to E.U. markets, while rejecting E.U.’s rules on free movement of individuals across borders. The Leave supporters also seemed surprised at the reaction from Scotland (a strong Remain supporter) to revive the proposal for a Scottish independence with another referendum in the near future. Northern Ireland, also a Remain supporter, is also questioning the advantage of staying in the United Kingdom. London as a financial centre is also threatened with the loss of access to the E.U. markets. The migration of businesses and many highly paid financial employees to other locations would be a major economic shock to England as well as London.
There is some doubt that Brexit will ever take place. The referendum was not legally binding and since there will be a new U.K. prime minister and perhaps even an election before this fall, a new parliament could well not exercise the exit request. The E.U. itself will do everything in its power to avoid the U.K. exit, as it would encourage other E.U. nationalist countries to follow the same course. A new referendum is also a possibility, as there was great complaint that the previous referendum had little detail as to the implications of leaving the E.U. Recent events could well convince many voters for the Leave movement that the cost would be too great.
The unfortunate problem with Brexit is the uncertainty it will cause for months to come. Will there be an election in the U.K? Will the Remain sentiment rise? If Brexit does happen, what impact will it have on the E.U.? There are already U.S. commentators calling this the beginning of the end for the E.U. Will this cause the Federal Reserve to hold off on its announced intention to raise U.S. interest rates? All these factors will create nervous unpredictable equity, fixed income and foreign exchange markets.
Adding to the uncertainty in the U.S. is the prospect of a Trump victory. Such an event, if we believe the rhetoric, would see trade agreements torn up and the possibility of trade wars.
While financial markets worry about the possible future events, what is happening right now?
All indicators are that the U.S. economy has had an excellent second quarter. Job openings are at record level, while wage growth at 3.5% year over year is well ahead of inflation. The problem in the U.S. job market appears to be the shortage of properly skilled workers rather than a faltering economy.Retail sales are strong, as is consumer confidence.The housing market continues to recover, but is hampered by the worker shortages.
In Canada, national economic growth continues to be challenged by economic declines in the Alberta economy. Despite recent oil price increases the significant fall in oil prices remains a drag on the Canadian economy. Canadian GDP will likely be flat to down in the second quarter. BC and Ontario continue to show positive growth along with booming real estate markets.
It is now possible to predict stabilization in oil prices at present levels, as declines in production and drilling will not keep up with rising demand as we move into the second half of 2016.
With financial markets facing turbulent times, Canadian pension plans, who are considered some of the most sophisticated investors in the world, have endorsed alternative asset classes in order to meet the return targets of their funds. While individual investors are not pensions, and each have different needs and objectives, especially in regards to liquidity, some strategies that pensions employ may benefit accredited investors. Strategies which focus on direct lending through mortgages or loans to high-quality companies, can provide much needed yield and cash-flow combined with capital preservation, which compares favourably to traditional fixed income. The addition of income producing real estate can add further diversification while producing cash-flow, with the potential for capital growth over time. In addition, investment in infrastructure and private equity, while having investment life cycles of up to 20+ years; in the past have greatly exceeded the returns of the public stock markets.
We believe alternative asset classes can be added to a traditional portfolio to improve the overall risk vs. return profile if done in a common sense way. As a recognized leader in wealth management, Northland Wealth has the expertise and experience to determine which alternative strategies can best fit a family’s investment portfolio, while providing access to ‘best of class’ managers in these areas.
Please speak with your Portfolio Manager to better understand how alternative investment strategies can complement your portfolio.