On Monday, June 27, we hosted a GSAMLive! webcast, where GSAM portfolio managers discussed the outcome of the UK EU Referendum, as well as key investment implications for the second half of 2016. We have synthesized eight key takeaways from the discussion.

1. Brexit is a historic event and we expect a period of significant uncertainty over the next few years. We think a United Kingdom (UK) recession is likely and market volatility could have negative feedback into the global economy. However, markets have generally functioned well and central banks are providing ample liquidity.
2. We think market volatility following the Referendum is a rational response to the fundamental risk and uncertainty created by Brexit. Determining value will take time as investors assess the longer-term implications and asset prices seek equilibrium following the initial post-Referendum position squaring.
3. We are proceeding on the expectation that the UK will exit the EU over an extended timeframe, with the terms of the negotiation yet to be determined. David Cameron has said that it will be down to his successor to determine when to trigger article 50; the new leader will be announced by 2 September. This means Article 50 is unlikely to be triggered until late 2016 at the earliest.
4. In the near term, our strategy is to remain cautious as we wait for more clarity on the negotiations over the UK’s exit and the second-round effects on global growth and markets. However, we expect periods of Brexit-related volatility to create dislocations in the markets, providing opportunities for active managers to differentiate among risks and opportunities based on fundamentals.
5. Many UK companies are global businesses and we think stock-picking will be important to finding opportunities in the post-Brexit environment. For the companies in the UK FTSE 100 equities index, more than 75% of sales come from outside the UK¹.
6. Tighter financial conditions are likely to keep the Federal Reserve on hold in 2016 as the consequences of tighter financial conditions remain ambiguous and uncertainty related to Brexit persists. We expect the Bank of England, European Central Bank and other central banks to take a wait-and-see approach, but may need to implement additional easing measures in the next few months.
7. Accommodative policy, low interest rates and the hunt for yield could extend the late stage of the US corporate credit cycle. Rising leverage in the US corporate sector leaves us cautious on the outlook for US credit and equities. However, “cautious” is not “negative” and we continue to see opportunities as further central bank accommodation and low rates could prolong the cycle.
8. Brexit contributes to a risky global backdrop for emerging markets (EM), but we think EM assets generally offer adequate compensation for the risks. We believe Brexit has few implications for China’s gradual pace of economic rebalancing. US dollar strength is a risk for EM but with the Fed presumably on hold, we think further dollar appreciation is likely to be limited.