Brexit: Wheels Keep Turning

Well, never a dull day. We came into this expecting a remain vote. I think markets were priced asymmetrically for that. The S&P 500 was within a whisker of an all-time high. Clearly we didn't get that remain vote. We got the surprise of a leave vote.

The pound has taken the majority of the hit, down about 11 percent. I'm surprised the Euro isn't down a bit more than that. We think this is just as much a European event as it is a U.K. event, and then within sectors not really that surprised with what's happened behind that.

The yield curve has flattened. The banks as a result have performed poorly, cyclicals have performed poorly. Industrials have performed poorly. Defensives have done relatively well. Emerging markets so far have been largely unaffected. There are large parts of Asia where markets really haven't fallen at all.

The Japanese market has been just fine, so far, you know, clearly a reaction but probably less of a reaction than I think a lot of us would have expected going into this. So history would tell you that markets tend to overreact in the short term. We've been through lots of geopolitical crises in the past.

In 1992 the U.K. left the ERM. Lots of people thought it was -- it was dubbed Black Wednesday. In fact, most people now would say it was one of the best events to ever happen to the U.K. economy, so it's possible that might happen going forward.

I lived in Hong Kong in 1989. The tanks were rolling into Tiananmen Square. Everyone was concerned about the future of Hong Kong with a transition in 1997. Hong Kong is one of the most vibrant cities on the planet.

Good businesses don't just disappear overnight, and our focus remains to focus on those best companies around the world with solid fundamentals, good balance sheets and decent valuations. The world -- you know, the world very seldom ends, so I think we'll be fine here.

So I think it really has different implications in different parts of the world. Clearly the epicenter would be the U.K. or Europe. Outside of that, you know, the U.S. economy still does -- is doing very well. Again, as mentioned before, a number of our Asian strategies really didn't miss a beat at all as a result of what's happening.

They're much more focused on what's happening in China, and I would argue that what's happening with the Chinese Renminbi and whether the Chinese can effect a slow landing or not -- we still think they can in China -- remains a far more important geopolitical event than what happened in the U.K. and Europe last week.

In terms of how we've handled this, I think it has thrown up a number of opportunities. Most of our funds tend to focus on higher quality growth companies at reasonable valuations. Largely those did quite nicely.

There have been opportunities thrown up where lots of things got thrown out all at the same time and into a market meltdown, so we've been judicious, we haven't traded excessively, and we're looking to pick off quality companies at good prices.

So the results of Brexit was clearly a surprise. However, June the 23rd had been in everyone's diaries for a long time, and if you contrast that with 2008 when Lehman's suddenly went bankrupt that was a real shock to the system and there were significant problems of capital at a lot of the major banks.

This time I'm pleased to say the financial system is functioning smoothly, liquidity is ample. I've had numerous meetings with lots of our key counterparties, trades are getting affected exactly as you would have expected, so in that sense everything is calm and fine.

Sure, there's been volatility in the markets, but we've seen that in lots of other geopolitical crises in the past. From our standpoint at T. Rowe Price we remain a very broadly diversified business. We're obviously predominantly still a U.S. business, and the U.S. is largely unaffected by what's happening here.

We've got a very strong balance sheet, and so life goes on. We continue to try to find the best investments for our clients.

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