Brexit Volatility Creates Opportunities

Brexit’s Ramifications

Last week's referendum in the U.K. sent risk-asset markets into a tailspin, as investors wonder what "Brexit"—the U.K.'s exit from the European Union—means for the U.K., the E.U. and, by extension, global markets. The political, economic and market implications are significant for both sides of the English Channel, and beyond. It's critical, however, to understand how the process is slated to play out near term and farther down the road and to recognize the many questions and uncertainties regarding its repercussions while keeping them in perspective. As always, the key to successful investing in an uncertain world is carefully considering future prospects relative to current prices.

• What Happened: Although the leaders of the U.K.'s establishment Tory and Labour parties campaigned for Britain to remain in the E.U. fold, 52% of British voters elected to leave the 28-member common market, amid high voter turnout of 72%. Tory Prime Minister David Cameron, who is credited with pushing economic reforms that helped make the U.K. Europe's most dynamic large economy, has resigned in the wake of the vote. Opposition Labour Party leader Jeremy Corbyn, meanwhile, has lost a no confidence vote by a wide margin after a slew of resignations from his shadow administration. New leaders of both parties will be selected.
• What's the Political Worry: Concerns of political contagion have grown dramatically, as calls for similar referenda among other E.U. members, and most importantly from those that use the common euro currency, spread in the wake of the vote. It's important to note, however, that the nationalist, populist parties pushing for similar "exit" votes aren't in power where their voices are loudest: France, Italy and the Netherlands. That said, there is a risk that Scotland, which in last week's Brexit balloting, voted to stay in the E.U., could hold another referendum on its continued presence in the U.K., after electing to remain a part of Great Britain two years ago. Northern Ireland also voted to stay in the E.U., and would no doubt like to keep its borders open with its cousins to the South, E.U.-member Ireland.
• What's the Economic Concern: Economists generally expect the U.K. to fall into a near-term recession, as investment projects get put on hold; housing, commercial & industrial real estate cools amid expectations of lower prices and fears grow that London's crucial financial services economy may not have as much access in a future outside the E.U. as it currently enjoys. As for continental Europe, it's losing the world's fifth-biggest economy and the fastest-growing of Europe's large economies, not to mention its biggest military.

The degree to which Brexit and the associated economic and political risks in the U.K. and continental Europe affect the day-to-day operations of a company or a sovereign issuer must be evaluated against its current business or economic fundamentals and future prospects. The volatility in asset prices, after all, may well not reflect meaningful changes in those fundamentals. For long-term investors, such price dislocations can present excellent entry points to world-class, overseas companies or sovereign debt that, however the Brexit process plays out, continue to have excellent prospects.

The views expressed are those of Thornburg Investment Management. These views are subject to change at any time in response to changing circumstances in the markets and are not intended to predict or guarantee the future performance of any individual security or the markets generally, nor are they intended to predict the future performance of any Thornburg Investment Management account, strategy or fund.

Additional risks may be associated with investments outside the United States, especially in emerging markets, including currency fluctuations, illiquidity, volatility, and political and economic risks.

Before investing, carefully consider the Fund's investment goals, risks, charges, and expenses. For a prospectus or summary prospectus containing this and other information, contact your financial advisor or visit our thornburg.com . Read them carefully before investing.

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