24 June 2016 | Flash Update

BREXIT Today but Everything’s the Same


The UK has voted to leave the EU and we are seeing all manner of negative headlines in the media. To reiterate points which we raised in our article yesterday, we urge all investors not to worry. We are watching our Risk Matrix indicators and individual components of stress and volatility and so far it has not triggered yet. In fact, should risks remain at the current level, we view this kneejerk sell-off in the markets as an excellent opportunity to buy into the markets as investors will realise that Europe is still Europe and everything’s the same.


Rising asset class correlations mean that the vote will trigger a sell-off across all exchanges and induce a flight to safe haven assets over the next week. Correlations are quite high above median levels (Fig 1) and what this does is trigger short term “flash-crashes”. We do not see a contagion effect, however, as the UK leaving is a specific risk as opposed to a systemic European-wide crisis. Any weakness in the US, broader Europe and Asia would subside once investors find out that nothing much has changed. However, the UK is definitely set for longer term pain and we would want to avoid the GBP and UK assets in the medium-term.

Fig 1: Rising Asset Class Correlations Means All Risky Assets Regardless of Quality Will Get Sold Off – Presenting a Buying Opportunity.

What We Are Watching For

What would make us turn short-term bearish? For one, we are watching all our risk indicators very closely. In addition, we want to track and see whether the UK sell-off will lead to a large and sustained global sell-off. For that, we want to see if global equity volatility continues to rise above important thresholds (Fig 2). We also want to know if the risk-off behaviour moves throughout all asset classes in a sustained way – by measuring how closely related the sell-off is (Fig 3).

Fig 2: Global Equity Volatility Had Been Receding Since the Feb 2016 Peak Sell-Off And We Want To Ensure That This Does Not Rise Too Much

Fig 3: Sustained Rising Correlations Amongst All Asset Classes From Present Levels Will Be a Negative Trigger.

How Are My Investments Impacted?

As highlighted yesterday, the specific risk impact from a GBP decline and UK FTSE 100 decline would only impact our portfolios by around 2-3%. Assuming a broader sell-off in equity markets over the next few days of around 10% in individual indices, we expect our portfolios to decline around 6-7%, as we are already holding 25% cash in our core equity fund in addition to varying amounts of high quality short duration bonds (depending on investor risk profile). We view the sell-off as temporary, and once markets start to realise that this vote impacts the UK more than anyone else, we expect markets to recover from their initial losses. In any event, we are relying on our daily risk matrix signals to let us know if markets do take a turn for the worse.

So What’s With The Fear?

We mentioned yesterday that no one knows the immediate impact the vote will bring. As with all European issues like Catalonia, Cyprus, Greece; the negotiations will drag on for years, struggle to the abyss, the media will trumpet doomsday scenarios and eventually the can will be kicked down the road. Our guess is that the primary distress that the Brexit vote brings signals a shift to anti-globalisation. New political forces led by anti-Euro, anti-bloc, anti-immigration figures will be pitted against established parties. Perhaps that is the reason why even Donald Trump enjoys a certain level of support in the US.

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