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Dear PSG Client,

Last week, a majority of British citizens voted and voiced their opinion that the United Kingdom should leave the EU (“BREXIT”). This was quite a surprise since both polls and odds makers showed the “remain” vote was ahead just prior to the referendum. Over the past several days, this has caused a sell-off in risky assets as investors flee to safety.

So what does this mean? This is the first time the European Union will have to deal with a country wishing to depart. This is not a legally binding vote. It will be up to UK politicians to begin negotiations with the EU. They could even wind up staying. David Cameron, the British Prime Minister, will be resigning. His predecessor will have to deal with this. If the UK chooses to exit, the process will likely take more than 2 years. BREXIT is a global trend and larger dynamics are in play here. After the 2008 financial crisis and global recession, many countries have been in a state of economic malaise. Most people feel worse off than they did a decade ago. Growth and wages are stagnant. Facing this, the natural reaction is to circle the wagons and move inwards, an increase in populism while moving away from globalism. We are seeing this right here at home with the popularity of anti-establishment candidates like Donald Trump and Bernie Sanders.

Investors hate uncertainty. Capital flees to safety and away from risky assets when fear rises. This is the case now. The risk is contagion: Will France want to exit the EU? What about Spain or Italy? Will the European Union unravel? This is the fear trade. Investors pull their chips off the table when they face the unknown. In addition, volatility causes several investment strategies and businesses to also decrease risk and move to safety until the markets settle down. Do not let fear (or greed) hijack your plan. We do not believe this is the start of another crisis like 2008. We will continue to monitor the markets and are looking for opportunities to redeploy capital. Prior to the BREXIT vote, our investment committee had identified areas of particular interest. At that time, we decided to not make any changes until after the Brexit vote as we were worried about the potential for a “leave” vote.

In regards to BREXIT, Barclays CEO Jes Staley last week told his employees “I do not pretend to have all the answers.” Interestingly, he pointed to the banks 325 year history in the memo as well. The point is, they have lived through crises before. Short term volatility sometimes makes it feel like the end of the world. Taking a long term view, citizens and businesses will adapt – the sun will come out tomorrow. We would agree. Please feel free to call us with any questions.

Jon Giordani, CFA
Chief Investment Officer
JonG - professional2011