Steven Romick – Will Brexit Spark A Much-needed Market Revaluation?

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Steven Romick – Will Brexit Spark A Much-needed Market Revaluation?

Steven Romick’s, co-portfolio manager of FPA Crescent Fund, special commentary titled, “Will Brexit Spark A Much-needed Market Revaluation?”

Markets globally have reacted negatively to the British having voted to leave the European Union (EU) after more than four decades. The night before the vote, UK betting markets reflected that the “remain” camp was heavily favored to win. In a 2015 speech titled, “Don’t be Surprised,” I wrote that “investing, like life, is imminently unpredictable. There are surprises – some good, some bad.” That speech seems all the more relevant today given global market volatility.

“Brexit” falls into the bad surprise category as investors clearly had not priced such an event into the market and so it caused stocks around the world to decline. Those companies more exposed to the UK, such as those in the financial sector and more cyclical businesses, have been hit the hardest while safe havens, such as gold, have rallied. The UK market decline in dollar terms was actually far worse than in pounds thanks to the British currency having wilted 10% versus the dollar.

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We didn’t have a compelling opinion in advance of the vote but what happens next is also unknown. Importantly, the referendum is not legally binding. In other words, the population voted for a divorce but it’s up to the government to submit the papers. The UK government now needs to exercise Article 50 of the Treaty of Lisbon in order to secede from the bloc. With Prime Minister Cameron’s resignation effective this October, that leaves the submission to his successor, who may not file in 2016. There is even a small chance that Brexit may not even