The United Kingdom’s vote to leave the European Union has roiled global markets today, especially in Europe. We are carefully monitoring the situation and would like to share a few initial thoughts.
In our view, the repercussions of the UK’s exit from the European Union will unfold over a long period of time. The terms of the separation will be negotiated over the coming months and could take years to implement. Ultimately, we expect the UK will develop a stable, functional relationship with the EU modeled on Switzerland and Norway. These countries elected to stay out of the European Union, yet retain deep linkages with the rest of Europe and tend to conform to most of the EU rules.
Potential negative consequences from “Brexit” include increased political uncertainty, reduced flows of capital and people, and lower consumer and business confidence. Upheaval in the financial markets can exacerbate a negative feedback loop as companies and individuals become more cautious in their investment and consumption decisions.
Over the last few weeks our global sector analysts have met with managements of several European portfolio companies. We are encouraged by their improving optimism about business conditions. We believe international equities are attractively valued, considering their high dividend yields, diversified end-markets, and scope for secular and cyclical profit growth.
Our International portfolios are benefiting from an underweight of the UK and less exposure to commodities. Our UK holdings tend to be multinationals that will be helped by a weaker Pound. In all our strategies, we remain focused on creating diversified portfolios of companies with high-quality financial and ESG profiles. We continue to assess risk, opportunity, and valuation in these volatile markets with the goal of delivering sustainable long-term returns.
