In the aggregate, we think it is fair to summarize the effects for different parts of the world as follows:

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1 Brexit Stage Right By Rusty Guinn Deputy Chief Investment Officer June 24, 2016 It was an eventful end to the week, nowhere more so than in the United Kingdom, where voters surprised markets, political observers and even bookies with a resounding vote to leave the European Union. We know many of our clients and partners have questions about how this may affect the world, financial markets and their investments. As always, the answer is complicated. In the aggregate, we think it is fair to summarize the effects for different parts of the world as follows: United Kingdom: Definite economic costs and uncertainty, but manageable long-term impact on the economy and markets. European Union: Very small near-term economic costs, but massive long-term risks to both economies and markets. United States and the rest of the world: A warning bell. Effects in the United Kingdom The implications for the United Kingdom from a political perspective are obviously large, but we remain relatively calm about Brexit s direct economic impact. We see no reason to believe that the U.K. will not be in a position to negotiate appropriate, and in some cases more advantageous, trade agreements than it had before, although there is clearly some uncertainty. It is hard to imagine, for example, that the major German importers of British machinery, engines, aircraft and vehicle parts and pharmaceuticals will not be influential in ensuring their own production costs do not explode. For Great Britain, this has the feeling of an event with definite frictional costs as its agencies, companies and employers adjust to whatever the new reality will be. Likewise, while the Brexit debate focused a great deal of attention on the explicit costs of EU membership, transfer payments, benefits and rebates, we think the real impact of those items is much smaller than that of the indirect and uncertain impacts on the economy. In any case, we think that the United Kingdom is likely to remain competitive in a world economy. While we believe the European Union could demonstrate (for the benefit of France and any other wouldbe dissenters) its hegemony through punitive negotiations with Downing Street during the separation process, the likeliest outcome remains a relatively successful muddle-through for the U.K. over the long-term Salient. All rights reserved. 1

2 U.K. Exports to Germany in 2014 Source: Source: AJG Simoes, CA Hidalgo. The Economic Complexity Observatory: An Analytical Tool for Understanding the Dynamics of Economic Development. Workshops at the Twenty-Fifth AAAI Conference on Artificial Intelligence. (2011) Effects in the European Union If the market has said anything today, however, it is that the major concern is the European Union. The markets that declined most on Friday were not stocks traded in London, but rather those traded in Milan, Paris and Madrid. As Epsilon Theory author Ben Hunt has been saying, Brexit s analog is not Lehman, but rather Bear Stearns a precursor and a scare, but in itself not a market-changing event. The Lehman event that many investors and markets are concerned about is the potential for referenda in other EU-member countries, especially France. Make no mistake, the potential break-up of the European Union could be a monumental event for the world economy and markets. We believe today s actions discount only a fraction of the potential impact from such an event Salient. All rights reserved. 2

3 One-day returns on June 24, 2016 Source: Bloomberg, as of 06/24/2016. FTSE 100 Index, CAC 40 Index, Deutsche Boerse AG German Stock Index, IBEX 35 Index, FTSE MIB Index. We believe the ECB and the remaining EU members will be doing everything in their power to ensure no further deterioration in the union, in liquidity and in markets. Should they be successful in messaging this to markets, it would not be surprising to see all of Friday s market action reverse and markets return to their previous low volatility state. We continue to believe that EU stability and government messaging around that stability will remain the most significant concern for markets for the foreseeable future. Effects in the United States and the rest of the world We believe the direct impact of Brexit on the U.S. economy and financial markets is likely to be muted; indeed, the impact on U.S. markets today was far less than almost anywhere else in the world. In the near-term, the effects are largely related to currency and are deflationary for which reason no investor should be surprised to see further central bank action back on the docket in the U.S., Japan and elsewhere. In fact, even now market expectations (based on Fed Fund futures) for 2016 include a non-zero probability of a cut in interest rates in the United States. This currency effect manifested itself greatly in Asian markets on Friday, where the yen was a primary beneficiary of a weaker pound and the Nikkei its unwilling victim. And despite almost no investor focus and protestations that anyone predicting a yuan devaluation is delusional, China s currency is now set at a 5-year low. As always, the game has many players. More importantly, from a long-term perspective what Brexit tells us is that the seemingly inexorable push toward populism and against globalization has taken root around the world. As the United Kingdom moves away from the European Union, it would be naïve to ignore that the reason many voted to leave had to do with concerns over immigration, the impact of free trade and the loss of national sovereignty. These same principles lie at the center of the upcoming U.S. elections as well. While we expect limited direct impact of Brexit in the U.S., we recommend investors keep a watchful eye on 2016 Salient. All rights reserved. 3

4 policy direction concerning trade and international cooperation. These could have a profound impact on long-term growth in the U.S. and long-term potential returns in U.S. financial markets. What s next? For additional commentary, we direct you to two key resources: first, the recent note published by Ben Hunt in which he discusses the current market environment. Second, we hosted a call on June 29 to discuss Brexit in the context of the Salient investment platform. To listen to the replay of the call: Call Replay Details: (will be available until July 29) Domestic Dial-In: International: Reservation #: DISCLOSURES This commentary is being provided to you by individual personnel of Salient Partners, L.P. and affiliates ( Salient ) and is provided as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s) and do not necessarily represent the opinions of Salient. It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Salient will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results. Salient is not responsible for any third-party content that may be accessed through this web site. The distribution or photocopying of Salient information contained on or downloaded from this site is strictly prohibited without the express written consent of Salient. Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Salient disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. Any offering or solicitation will be made only to eligible investors and pursuant to any applicable Private Placement Memorandum and other governing documents, all of which must be read in their entirety. Salient commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Salient recommends that investors independently evaluate particular investments and strategies, and encourage investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor s individual circumstances and objectives. Salient is the trade name for Salient Partners, L.P., which together with its subsidiaries provides asset management and advisory services. Insurance products offered through Salient Insurance Agency, LLC (Texas license # ). Trust services provided by Salient Trust Co., LTA. Securities offered through 2016 Salient. All rights reserved. 4

5 Salient Capital, L.P., a registered broker-dealer and Member FINRA, SIPC. Each of Salient Insurance Agency, LLC, Salient Trust Co., LTA, and Salient Capital, L.P., is a subsidiary of Salient Partners, L.P. DEFINITIONS FTSE 100 Index is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange. CAC 40 Index is the most widely-used indicator of the Paris market, reflects the performance of the 40 largest equities listed in France, measured by free-float market-capitalization and liquidity. Deutsche Boerse AG German Stock Index is a total return index of 30 selected German blue chip stocks traded on the Frankfurt Stock Exchange. IBEX 35 Index is the official index of the Spanish Continuous Market. The index is comprised of the 35 most liquid stocks traded on the Continuous market. FTSE MIB Index consists of the 40 most liquid and capitalized stocks listed on the Borsa Italiana Salient. All rights reserved. 5