Policy uncertainty will remain elevated, putting upward pressure on risk premiums. The upside of uncertainty is that monetary and perhaps even fiscal policy will be looser than otherwise would be the case. That is a plus for stocks, but may cushion downside risks more so than propel capital appreciation in the absence of stronger global growth.
Deficient global aggregate final demand remains the defining characteristic of the global economy, given high debt loads and ongoing private sector deleveraging in the developed world. The developing world may need to undergo a similar fate. Policy is already extremely easy, but has been unable to spur much growth. Global trade remains very weak.
U.S. companies are already having difficulty generating sales growth. Inflation expectations have plunged, and are an excellent leading indicator for actual corporate sector pricing power.
Any additional U.S. dollar strength would amount to a tightening in global financial conditions, importing deflationary pressures into the U.S. and dampening top-line prospects.
In turn, that would prolong the retrenchment period required to right-size the cost structure of many businesses, especially in the face of the recent increase in labor costs. It is no wonder our profit model cannot gain any traction.
As a result, the Brexit vote does not alter our portfolio strategy, if anything, it reinforces it. Defensive sectors had been outperforming prior to the referendum in response to an increasingly shaky global economic outlook.