Remember Brexit? The markets didn’t seem to as the languid summer rolled along into mid-August. 

The days immediately following the June 23 vote by a majority of Britons to extract their country from the European Union was like an investment Armageddon where the British pound got pounded, major global stock indexes fell through a trapdoor, and yields on U.S. Treasurys and other bellwether developed-market bonds tumbled in the risk-off environment. But the markets—particularly equities—quickly reversed course as the mind set toward Brexit shifted from apocalypse to apathy.

This much we do know: The Brexit aftermath will have have both short-term and long-term consequences. What we don’t know is what exactly those longer-term consequences will be. Brexit was yet another jolt to global markets that seem ever more connected and volatile, and more tumult is likely to come (whether or not they’ll be Brexit-related). For investors, that means being mindful of protecting their portfolios against the next shoe to drop.

“Brexit doesn’t mean a lot in and of itself, which is why there was a sharp bounce back in the markets,” says Ben Hunt, chief risk officer at Salient, a diversified asset management firm. But it could be a harbinger of things to come.

The way he sees it, Brexit is a Bear Stearns moment, not a Lehman Brothers moment. In other words, both the Brexit vote and the collapse of investment bank Bear Stearns in March 2008 were viewed as idiosyncratic events that the markets shrugged off. As it turned out, Bear Stearns was a prelude to the systemic problems of the global financial system symbolized by the bankruptcy and demise of Lehman Brothers six months later. 

“I think Brexit is a big deal, the same way Bear Stearns was a big deal, because it is the first car on this train of anti-globalization, anti-status quo, anti-trade political movement that’s growing around the world,” Hunt says. “The Lehmann Brothers to Brexit’s Bear Stearns that I’m looking ahead to are the political events that can’t be papered over.” 

The first item on the worry parade is Italy, where there’s an October referendum on a constitutional overhaul proposed by Prime Minister Matteo Renzi that he says will stabilize that country’s chronic political instability. He has promised to quit if the referendum is defeated. Part and parcel to that is the sorry state of debt-laden Italian banks. Italy is negotiating with the EU to recapitalize its banks, arguing that flexibility is needed to prevent bank failures that could ultimately cause a contagion that could take down Europe’s banking system. 

The Italian vote in October is seen as a referendum on how Italians feel about their participation in the euro zone, and the fear is that political instability caused by a “No” vote on Renzi’s constitutional overhaul could cause financial instability in its banking sector that could set off bad outcomes across the continent.

After that comes the U.S. election in November, with GOP nominee Donald Trump’s stances on trade and tariffs stirring concerns about negative domino effects across the globe. Ben Hunt says if Trump threatens a trade war with China, the Chinese would likely respond by floating their currency, resulting in devaluation. 

That, he argues, would be destabilizing to the European banking system because their banks don’t fund themselves in the same way that U.S. banks do. U.S. banks are funded by depositors, while European banks are funded by securitizations and by essentially being merchant banks, making them intertwined with—and levered to—global trade finance.

“So when a country as important to global trade as China devalues its currency, it means that existing loans based on the old value of the Chinese currency become unglued,” Hunt explains. “That’s when you get a credit freeze, akin to the 1997 Asian credit crisis. This is a potential earthquake 20 times greater than what happened when Thailand devalued its currency in 1997.”

Further out is the 2017 presidential election in France, a country where EU-skepticism is greater than what existed in Great Britain before the Brexit vote. If far-right populists gain the upper hand in that vote, there’s a fear that France will bolt the EU—a scenario known as “Frexit.”

Post-Brexit Maneuverings

In July, the International Monetary Fund slightly trimmed its forecasts for global economic growth both this year and next because of Brexit’s impact on already-fragile business and consumer confidence. 

The IMF said the U.K. and Europe will take the biggest hits, which will crank up the pressure on policy makers to strengthen banking systems and make good on much-needed structural reforms. “The real effects of Brexit will play out gradually over time, adding elements of economic and political uncertainty,” said Maurice Obstfeld, IMF chief economist and economic counsellor, in a news release announcing IMF’s world economic outlook update. “This overlay of extra uncertainty, in turn, may open the door to an amplified response of financial markets to negative shocks.”

So how to invest in this type of environment?

“It’s very hard to figure out what exactly to do,” says John Maxwell, portfolio manager of the Ivy International Core Equity Fund. “For sure, I don’t want to be overweight domestic Europe.”

Maxwell says he’s defensive from a balance-sheet standpoint, but that his fund owns its share of cyclical stocks because some of them are too cheap to ignore. “The market is kind of bifurcated between 10 times earnings and 20 times earnings stocks, with the 20 times generally being defensive, high-quality, stable dividend payers and the 10 times being cyclical companies,” he notes.

One of the positions Maxwell’s fund recently added was Adecco, a Swiss provider of human-resource services that got hit during the Brexit downdraft. “People thought Brexit would hurt the global economic cycle, so people sold early-cycle stocks like temp services,” Maxwell says. “But the temp services industry is transforming itself, and Adecco is a low-risk company with a 5% dividend and trades at about 10 or 11 times earnings.”

Another cyclical stock he likes is Bridgestone, the Japanese tire maker which he says offers compelling value (about 10 times earnings), a net-cash balance sheet and a yield of more than 3.5%. “It’s hard to ignore a business like that, which we think is a strong survivor,” he says.

Maxwell also added to his fund’s position in Nestlé, the world’s biggest food company. “It has a great CEO, trades at around 25 times earnings and pays a nearly 3% dividend,” he says. 

Rick Rieder, chief investment officer of global fixed income at BlackRock and portfolio manager of the BlackRock Strategic Global Bond Fund, says recent events have caused him to focus his fund’s portfolio on conservative risk. He believes Brexit will be a drag on European and U.K. growth, which in turn will weigh on interest rates there.

“As long as we’re in an environment of sluggish growth, low rates and the dollar not appreciating, that’s nirvana for the emerging markets,” Rieder says. “With many developed markets at negative yields or zero, there are places like Brazil, Argentina and Indonesia or even Mexico that have significantly positive real yields.” 

To diversify risk, he likes bonds in countries where rates will remain low for a while, such as Australia, Europe and parts of Asia. And he was long the Japanese yen, a position he says performs well in a risk-off environment. “So we’re being more conservative than normal, but also looking tactically at what will do well,” Rieder says.

Other Options

Kevin Simpson, founder and portfolio manager at Capital Wealth Planning LLC in Naples, Fla., says he successfully employed a covered call strategy heading into the Brexit vote because he felt the market had run up aggressively into the referendum and expected the market to take a breather after the news. What he didn’t expect was a “No” vote, prompting him to joke that sometimes it’s better to be lucky than smart. That said, he believes covered calls are always a good way to counter volatility.

“I use covered calls to act as a modest hedge in our portfolio to help buffer the downside of any pullbacks to the extent of the premiums we bring in. We’re always hedging to try to take advantage of volatility. The byproduct is that it generates cash flow, which is appealing in respect to where interest rates are right now.”

Keith Springer of Springer Financial Advisors in Sacramento, Calif., likes gold as a deflation hedge. “Brexit means continued deflation, which will depress earnings for corporations in Europe, and especially in Britain,” he says. “We’ll see more stimulus from the European Union, which will keep rates down and which will increase deflation that’s a hindrance to growth.”

And he favors U.S. stocks. “I’d stay away from European stocks, at least until you know what comes of Brexit.” 

Ben Hunt at Salient focuses on real assets and real cash flows that are less exposed to policy-driven storms. “I have an expansive definition of what real assets and real yield can be,” he says. “It can be real estate, energy pipelines, intellectual property. Those investments won’t match whatever the casino-driven benchmark might be. I don’t expect to beat the S&P 500 by owning a stock that’s slow and steady and gives me a reasonable yield.”

Brexit might be a shot across the bow regarding Europe-induced global financial, economic and/or political mayhem. Then again, maybe not. Regardless, it’s probably only a matter of time before something new hits the fan—which might be the ultimate takeaway from Brexit.