Brexit really happened. Strategies and Recommendations

Dear Friends,

I am sure by now that you have heard of the news of the result of the Brexit referendum vote in which the "Leave" vote won by more than a million votes, putting UK on the course of exiting the European Union. After much consideration over the weekend, I have decided to pull out from the European component of the portfolio.

First, a damage report. The Allianz European fund lost 3.72% on Friday which is equal to around 1.2% in losses for the portfolio, which is a much better outcome than I hoped for  given that pound fell 10% and the Euro region lost around 10% at their worst point during Friday. The timely switch out of half of the European equities out before the Brexit vote when the European equities were at a high also helped to minimize the damage done to the portfolio.

Next, I started to analyze if there is a possible strong rebound like what happened during the Jan Oil and China crash as that will determine whether I should hold on to the current position or not. As the weekend unfolds, we saw the 2 two major political parties: Conservatives and Labor falling into party civil war with nobody willing to take up the leadership to lead UK out the EU zone. Political movements in Northern Ireland and Scotland to call for their cession from United Kingdom would add more to the chaos. From the look of things, the Brexit chaos will last for months putting any medium term rebound on European equities on a low probability.

The other worrisome development of China devaluating their currency also came true as Yuan fell by 2% over the weekend and oil price fell by 5% and they are expected to fall further should Pound and Euro continues to fall. Monetary policies in EU and Japan are more or less exhausted and the political chaos in EU will lead to ineffective steering of the EU region through this period of weak economic activity.

With the China, Oil, Brexit and EU crisis all happening within a short period of 5 months, these 2 storms may merge into a larger financial hurricane that may unleash destruction around the world.

In this case, I have chosen to exit all of our Asia and European positions leaving behind a small proportion of American equities, which may benefit as a result of the chaos as the US Central Bank will probably hold off the rising of interest rates. Than again, US equities valuation is extremely unattractive now but given the global financial climate now, it is understandable why global investors are piling into US equities.

I have keyed in the trade for the switch. Do look out for it and approve it ASAP.