361 Capital's Weekly Research Briefing: Still Post-Brexit...

The financial markets remain focused on the 5th largest economy in the world. While we don’t know what the U.K. will look like in the future, the markets are not waiting and are placing their bets. Global government bond yields continue to evaporate as most major countries ended the week with their major benchmarks at all-time low yields. As returns move to even more unacceptable levels, investors are being pushed out into taking on duration and credit risk while others are looking at equity income proxies. Many Utility, Consumer Staples and REIT names continue to make all-time highs while high quality Healthcare names are also getting a push higher. Seeing the opposite are Financial stocks which continue to get hit from falling yields and uncertainty in their Trading and M&A volumes. Precious metals and the miners digging it out of the ground have benefited from an increased likelihood that the Fed will not be raising rates. While through Brexit returns were mostly a push for U.S. investors, anyone holding some counter-trend algorithms likely did well. (Hats off to our very busy team over the last week.) From here we look forward to the earnings reporting season and wonder what Pepsi will tell us about the Brexit impact this week. The U.S. markets might also become more focused on the race for the White House, as both major parties hold their conventions this month. But for now, the U.S. equity markets look healthy. The British and Euro fireworks have stayed away from our shores, while falling risk-free rates have sent the broader U.S. index to new highs in breadth. Now can we keep our summer gains or fall into the worries across the Atlantic?

While the markets have recovered from peak Brexit, there has been little to cheer for if you are an investor in U.K. or Euro Equities…

I have seen some crazy suggestions that the Brexit has been a positive for the British financial markets just because the local FTSE 100 index is higher. Nothing could be farther from the truth. First of all, the FTSE 100 is primarily made up of global mega caps that make 75% of their sales and earnings away from the British Pound. Think global pharma companies like Glaxo, consumer product companies like Unilever and major Oil companies like BP. Sure the FTSE 100 has done well because the Pound has been crushed 10%+ versus the US$ and 9% versus the Euro. If you look at the more local U.K. stocks that rise and fall with the U.K. economy, their midcap index is -5% since Brexit. And if you happen to be a U.S. investor in U.K. small cap companies, you are looking at a 15% slap to your portfolio. Europe equity investors have done no better with the Euro STOXX index -5% in local and -8% in US$ terms.

(prices from Brexit vote through 7/1/16)

To read the 361 Capital Weekly Research Briefing in its entirety, please visit:  http://hvst.co/29l668d