November Surprise: How Markets Are Playing the Risk of Another Brexit

In the event of unexpected election results, don’t expect long-term losses, investors say

A rolling art installation sits in Manhattan on Wednesday.
A rolling art installation sits in Manhattan on Wednesday. PHOTO: GETTY IMAGES

Nov. 5, 2016 7:00 a.m. ET

Tuesday’s U.S. presidential vote offers striking parallels to Britain’s June referendum, fund managers say, with narrowing polls, a backlash against “establishment” politics and one outcome that may hit stocks hard amid a sudden break from the status quo—in this case, a Donald Trump victory.

After Britain’s vote to leave the European Union, which defied many predictions, markets sold off but soon recovered.

Burned by Brexit, many investors are taking cues: Don’t trust polls or bookies; prepare your portfolio for short-term falls, but stick to your long term convictions.

“Brexit caught the world off guard,” said Michael Thompson, managing director and chairman at S&P Investment Advisory Services. “Most people now realize anything is possible,” he said.

Markets weren’t prepared for Brexit. The CBOE Volatility index, which measures short-term volatility implied by options prices, remained mostly steady ahead of the U.K. referendum on June 23, while stocks and the pound continued to head higher. In the two days that followed, the S&P 500 lost 5.4% and the Stoxx Europe 600 shed 11%, while emerging market currencies and sterling plummeted. Havens like gold jumped in value.

Most investors believe a Donald Trump victory would have a similar impact on markets in the short-term aftermath, given his stated opposition to current trade policies and what they say is a lack of clarity in his policies. Democratic presidential nominee Hillary Clinton represents continuity, they say.

“Clinton is much more of a known entity by markets,” said Niladri Mukherjee, director of portfolio strategy at Merrill Lynch Wealth Management.

So some investors are sifting through the post-Brexit reaction and adjusting their portfolios to prepare.

As polls have pointed to a tightening race, the CBOE Volatility Index has risen to above 22, its highest since the U.K. referendum. The VIX, known as a “fear gauge,” is calculated from the prices investors are willing to pay for protective options tied to the S&P 500.

The S&P 500 has fallen for eight consecutive sessions through Thursday, its longest losing streak since the 2008 crisis.

While Mrs. Clinton remains ahead in the polls, her lead has narrowed.  PredictWise, a New York-based Microsoft research project that compiles U.S. poll and betting-market data, gave Mrs. Clinton an 83% chance of becoming U.S. president, down from 90% last week.

Many investors, though, aren’t relying on such predictions. Ahead of Brexit, many polls had the Remain camp winning but by a narrow margin. And bookies, at times, had all but written off the chance of a Leave victory.

“I think what the Brexit vote did was make people question legitimacy of polls period, and that is carrying over to the U.S. election,” said Peter Tuz, president at investment adviser Chase Investment Counsel.

Mr. Tuz has been holding on to a bit more cash as insurance against an immediate selloff of riskier assets.

Others have favored haven assets such as gold and U.S. Treasurys, while dialing back on investments perceived as most risky.

In the most recent week, government bond funds posted their first inflows in 17 weeks, according to a Bank of America survey. Investors redeemed money from emerging market equities, while withdrawals from high-yield funds were at their fastest pace since January, the survey said.

But the lesson from Brexit is, don’t expect losses to be long-term, some investors say.

Stocks are likely to recover, many fund managers say. So they are leaving their long-term targets for U.S. stocks unchanged regardless of the outcome of the election.

“We’re telling our clients to stay calm and carry on,” said Kully Samra, managing director at Charles Schwab.

Strategists at Capital Economics are forecasting that the performance of the S&P 500 will be “a bit like” that of Britain’s main equity benchmark, the FTSE 100, in the wake of Brexit.

“After a lurch to the downside, a weaker currency and a lack of radical policy changes in practice would fuel a recovery,” they said in a research note.

The export-heavy FTSE 100 index shed around 5.7% in the two sessions following the referendum. But in just two days it more than reversed those losses as the pound plummeted and the Bank of England stepped in to shore up growth.

Few expect the dollar to come under the sort of pressure the pound did, which is still around 17% below where it traded against the greenback ahead of the referendum. But should the U.S. election spark market turmoil, many analysts expect the Federal Reserve to hold off on a December rate rise, softening the dollar and cushioning the S&P 500 from a wider fallout.

The U.K. is some way from leaving the EU, or even knowing what the shape of its future relationship with the trading bloc will be. But meanwhile, no policy has been enacted and the British economy has fared better than expected since the vote.

Likewise, the actual policy impacts and ensuing repercussions from the U.S. election remain far from clear, and will take time to affect the economy, said Philip Marey, U.S. strategist at Rabobank. So the market is likely to recover quickly from the uncertainty-driven selloff, he said, at least until the long-term direction becomes more clear.

Whichever candidate gets elected will likely struggle to push policies through Congress, and both have promised to increase infrastructure spending, mitigating the impact of the election outcome, said Romain Boscher, global head of equities at Amundi Asset Management.

The asset manager is holding some long-dated Treasurys and volatility products as protection against a steep market swing.

To be sure, there are other factors investors are taking into account when looking at the U.S. vote that have nothing to do with what happened in Britain. For instance, Brexit was never likely to affect the Mexican peso and Canadian dollar in the way that investors say a Trump victory could.

But the phenomenon driving both votes shares similar roots, many investors believe. They point to the increasing political populism in the developed world that has arisen from stagnant wages and concerns around immigration, and that has fueled support for both Brexit and Mr. Trump.

“The root cause is very similar,” said Mr. Marey.

Write to Riva Gold at


 (The world has been rejecting the “elites.”)


Goldman Sachs has had a long alliance with Democrat Hillary Clinton dating back to her Senate days. She is pictured here with Lloyd Blankfein, Chairman & CEO, Goldman Sachs, in 2014. | Getty


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One Response to “November Surprise: How Markets Are Playing the Risk of Another Brexit”

  1. daveyone1 Says:

    Reblogged this on World4Justice : NOW! Lobby Forum..

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