Northwestern Mutual
Brexit Consequences Brexit Consequences
< Back to Insights & Ideas

Are There Brexit Consequences For Your Finances?

Insights & Ideas Team •  June 28, 2016 | Your Finances

There has been a lot of news about the so called “Brexit” vote in the U.K. over the past several days. “Brexit” refers to the June 23, 2016 referendum by British voters to exit the European Union. Specifics aside, what does it mean for the economy and for your financial plan? To help you answer that question, we convened a panel of our financial experts to discuss potential consequences for your finances.

Our Panelists:

Ron Joelson

Ron Joelson is Northwestern Mutual's chief investment officer and oversees the company's general account, valued at approximately $200 billion as of June 2016.

Christian Mitchell

Christian Mitchell is president of the Northwestern Mutual Wealth Management Company. He oversees Northwestern Mutual’s investment advisory business, fee-based financial planning, Investment Products and Services (IPS) product development and IPS communications.

Brent Schutte

Brent Schutte is chief investment strategist of Northwestern Mutual Wealth Management Company. He oversees the investment philosophy for individual retail investors and the investment strategy for more than $100 billion in assets under management as of February 2016.

The following is an excerpt from our discussion about the impact of the Brexit:

Christian: Last week we had an exciting vote in the U.K. Often when we have things like that happen, people get caught up in the moment and lose the broader context of what’s going on. I'd love to provide some broader context on the developments last week. Let’s start with you, Ron.

Ron: It took everyone by surprise, and so we saw a lot of volatility in the marketplace because people were nearly all what’s called "offside." Basically what that means is that they were not expecting voters to recommend the Brexit, so people had a risk on trade that was all of a sudden looking pretty bad. And so, when the vote happened, they quickly had to unwind their positions and quickly had to move into more of a risk off kind of a trade. That created a lot of movement in the markets. Fortunately, there was plenty of liquidity. But that was the overall context.

That continued after the Brexit vote. We saw equity markets declining. We saw currency moves, we saw a 30-year low with respect to the U.K. currency, the pound. And we’ve seen movements in financial stocks—bank stocks that have really been some of the largest decliners. For instance, U.K. banks saw more than a 20 percent decline. These were somewhat unprecedented moves, so there have been some substantial follow on financial effects as a result. Brent:

Brent: From the risk on, risk off, we’ve had a lot of these over the past five, six, seven years after the financial crisis. I like to take it back to a bigger picture when I look at our outlook going forward. What are the underlying fundamentals of the U.S. economy, and could this turn into something more or not? And when we take a look back at now versus 2008, one of the things I like to look at is the U.S. banking system. If you're going to have some sort of crisis in a country, it’s usually through the banking system. So it’s ironic that the day before Brexit vote actually occurred, the Federal Reserve came out with its annual stress test. The Fed went through and they stress-tested 33 of the largest U.S. banks, comprising 80 percent of total banking assets. The test looked at what would happen to banks if GDP draws down by 6.25 percent, if the unemployment rate goes up by 5 percent, if there is a severe recession in places like the U.K. and the Eurozone. The answer was yes, all the banks would get through better than they did in 2008. All of them passed. So while there is this short-term uncertainty, I think over the next couple days we’ll start to get more answers about who’s in charge in the U.K., what the negotiation process will be, etc.

But if you look at the fundamentals of the U.S. banking system and the U.S. consumer, we’re in a better place than where we were in 2008.

Christian: Ron, can you put this in a broader political context in Europe more generally?

Investing for You: 5 Critical Questions for a Smart Strategy

Ron: From a political perspective, the concern on the part of U.K. voters was mostly about immigration and workers in other EU countries wanting to come to the United Kingdom for jobs.

I contrast that pretty significantly from the other countries in the EU; they are also worried about immigration but much more from non-EU kinds of countries. So, it made sense for Brexit to be voted on from that perspective, but that's also a reason why there’s a little bit less impetus in other countries for a similar vote, although there is interest in breaking up the EU in other countries.

Christian: If I’m a client listening to you guys, I think a natural question in my mind might be, so what’s the impact on the Northwestern Mutual general account, the promise it’s backing for my risk products? And what’s the potential impact on my investment account?

Ron: I feel pretty good about it. We already run the portfolio conservatively, right? We’re a company with the highest ratings in the insurance industry, and we want to maintain that. And so, we entered the situation that way, but we also made some moves prior to the Brexit call that I think were helpful.

Brent: I would take it from a step back and just mention that I'm hopeful that no one was invested in equities on Friday and needed the money in the next couple of years. That money should be for 5, 10, 15, 20 years down the road. That’s why we practice diversification. Let me pause and ask you, Christian, to talk about what this means in your mind for our clients.

Christian: I think moments like this really emphasize some of the unique aspects of our value proposition—certainly, our financial strength that Ron touched on. Secondly, it really shows the importance of a financial plan, and not that the financial plan is some kind of rigid formula that you just adhere to in situations like this. It can be flexible, but it gives you a game plan, it gives you a strategy to face this uncertainty. Lastly, and I would say most importantly, is the financial professional that you work with. I think, as human beings when we face stressful moments, whether it’s health, a job or certainly our finances, we want to interact with another human being.

Ron: Plus, those professionals tend not to act emotionally, right? We all act emotional sometimes with our own portfolios, but when you have a professional who’s coldly looking at the markets and what you should do, I think sometimes the cooler head prevails.

Brent: If you had an asset allocation on Thursday, it didn’t change overnight. That’s because how much you have in the different securities is dictated by your longer term goals and objectives. And I don’t think those changed between Thursday and today.

Christian: And I think permanent life insurance has a really interesting role to play in instances like this.

Ron: In these kinds of market situations where there’s a lot of volatility, we find that financial professionals get phone calls from our clients saying, “Hey, where does permanent life insurance fit here?”

Once clients have determined they have a need for insurance, it’s very interesting to see how the asset component of permanent life insurance can perform in volatile markets. And it’s simple in the sense that with whole life insurance, cash value won’t decline. So, when there’s market volatility and equity markets going up and down and up and down, the cash value is only increasing. That’s, obviously, a very important benefit of permanent life insurance.

The opinions expressed are those of individual investment professionals as of the date stated on this article and are subject to change. This material does not constitute investment advice, is not intended as an endorsement of any specific investment or security and is not a prediction of what will happen in the markets.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise and conversely when interest rates rise, bond prices typically fall. This also holds true for bond mutual funds. When interest rates are at low levels there is risk that a sustained rise in interest rates may cause losses to the price of bonds or market value of bond funds that you own. At maturity, however, the issuer of the bond is obligated to return the principal to the investor. The longer the maturity of a bond or of bonds held in a bond fund, the greater the degree of a price or market value change resulting from a change in interest rates (also known as duration risk). Bond funds continuously replace the bonds they hold as they mature and thus do not usually have maturity dates, and are not obligated to return the investor’s principal. Additionally, high-yield bonds and bond funds that invest in high-yield bonds present greater credit risk than investment grade bonds. Bond and bond fund investors should carefully consider risks such as: interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund.

Rate This Article