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PGAM Thoughts on Brexit

Given the recent vote in the United Kingdom to leave the European Union, we thought it would be helpful to let you know our initial thoughts on recent developments.  In order to transmit our thoughts as quickly as possible, we are utilizing e-mail to communicate with you.

The markets were surprised by the vote in the UK to leave the EU. Hence the reaction in markets since last Friday.

There is a high degree of uncertainty as to how things will play out. In the UK there is a leadership vacuum. It is clear that the government was unprepared for a “Leave” vote in last Thursday’s referendum.  The current Prime Minister David Cameron has announced that he will  resign by early October by which time the Conservative Party will have to  name a replacement.  The Labour Party is also faced with the likelihood of a change in leadership.  A snap election seems a good possibility and it is possible that the results would weaken the case for “Leave.”  At the very least, there could be an extensive delay in the invocation of Article 50 which is a necessary precursor to beginning negotiations on the exit of the UK from the European Union.  In the meantime the UK remains a full member of the EU.  Negotiations will be complicated by the fact that Scotland and Northern Ireland voted to remain in the EU-so the question could arise as to whether they wish to remain in the UK.

Over the near term, the impact on the UK economy is probably negative. The UK runs a big trade deficit which needs to be offset by capital inflows. It will take a weaker pound than before to keep things in balance. Companies which export will benefit from the weaker pound while those dependent on the domestic economy will be hurt on balance.

For the rest of Europe, the risks are to the longer term viability of the EU. If the UK can leave, so could other countries (Italy, Spain?).  On the positive side the EU could be strengthened if Germany and France view Brexit as a wakeup call and move more assertively to accelerate integration and to utilize fiscal stimulus to benefit the European economy.

The United States is not completely immune to Brexit-related developments.  However, the U.S. will be impacted to a far lesser ex tent than the UK or the EU.   Consequently, the U.S. will be perceived as a safe haven, benefitting U.S.  fixed income and equity assets.

Uncertainty is bullish for gold, which probably continues to perform well.

The impact of all the uncertainty is likely negative for equities and positive for bonds over the very near term.   As always, we focus on the intermediate and longer term in our management of client assets.  We continue to hold higher than average cash reserves as has been the case since early this year. And will continue with this strategy until there is more clarity in the investment environment.   Inevitably, a buying  opportunity in equities  will arise and we intend to utilize the reserves to  take advantage of exceptional values in common stocks globally.  As the situation becomes clearer, we will remain in touch with you.

Important Disclosures:
This report is for informational purposes only, and contains data based on information derived from sources Princeton Global Asset Management (PGAM) believed to be accurate. However, PGAM cannot assure the accuracy of the data. Past performance is not a guarantee of future results. Portfolio holdings and characteristics are subject to change. The information in this report should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the securities transactions or holdings that may be cited were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities cited.

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