We may not have expected Brexit but we were prepared for it. I wrote on Wednesday about our defensive positions in the US dollar and also our protection trades.
Today, we have witnessed the pound plummeting against the US dollar and global stock markets heading downwards. Our day started early, just before it became official that we will be leaving the EU.
We have been able to take advantage of our preparation and sell some of our US dollar exposure, taking profits. We have favoured the US dollar, over sterling, for some time. This has been largely based on the strong economic recovery in the US versus the weaker one in the UK and Europe. The US dollar traded at an average price of $1.483 yesterday. Early this morning it plummeted to $1.325. We attempted to trade at 4.30am but liquidity was very low. In the end, we sold a tranche of our US dollar exposure at just after 7am at $1.367, benefiting from an 8% move. The rest was sold this afternoon at $1.368. The position has done what we expected it to do, though we didn’t expect it all to come in one day.
We have retained our outright protection positions within the Cautious Risk and Balanced Risk Funds. These will make money as the markets decline. On their own these trades won’t completely offset any global equity losses but they will help to reduce overall losses.
We have also sold some call options, designed to benefit from movements upwards in the market, taking profits. This may seem counterintuitive - the markets fell early this morning, but the price rose higher. The spike in volatility caused by the shock Brexit vote (a shock to the markets even if it wasn’t a shock to at least half of the electorate) drove the price higher, albeit momentarily. This trade was started at 6.35am and was done just after the London Stock Exchange opened at 8am.
As I write, both the FTSE 100 and the S&P 500 are rebounding upwards, after the initial shocks. Cameron’s resignation has bought breathing space and short term clarity. No changes just yet. But the political landscape is changed irrevocably. The markets simply carry on and we will continue to work to ensure client portfolios are positioned for strong long term risk adjusted returns, whilst watching out for opportunities amidst the volatility.
Caroline Shaw CFA, MEng (Hons), Dip PFS, IMC, Chartered MCSI
Head of Fund & Asset Management
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