The long awaited “Brexit” vote – the referendum on whether Britain should leave the European Union (E.U.) – took place yesterday. The closely watched results are in and the “yes” side has won. Britain will be the first nation to leave the E.U. in its 40 year history. Below summarizes our thoughts on the potential implications for the markets and investment portfolios.
Great Britain is the 5th largest economy in the world. As a member of the European Union (E.U.), Britain has been able to trade openly with other member countries and operate as one of the E.U.’s financial services hubs via its capital city, London. Several of Britain’s political parties have been calling for a vote on E.U. membership for the last several years. This particular referendum on leaving the E.U. was set in motion when Prime Minister David Cameron promised to hold a vote on E.U. membership if he won the 2015 general election. That promise and decision to hold a referendum has now cost Cameron his job, as he announced his resignation earlier today.
The true economic impact of Brexit will depend on what type of exit settlement is reached by Britain and the E.U. Great Britain will invoke Article 50 of the E.U. Treaty which will start the clock on a two year negotiating period on the terms in which Britain’s departure will occur. Of particular importance in that negotiation, is whether or not Britain will retain access to the E.U. for trade while remaining the center of Europe’s financial services industry. Answers to questions like this will not be found anytime soon, as it will take several years for Britain to actually leave. One deep-seated fear is that Britain’s departure will cause other countries to follow suit, resulting in economic chaos and pronounced uncertainty. The effect to the U.S. will be felt through a stronger U.S. dollar, which in turn makes our exports more expensive. Given that Europe is a major trading partner for the U.S. this should not be overlooked and will likely be one of the most direct impacts to the U.S. and our businesses.
As is the case with any unprecedented geopolitical event, market reaction is difficult to predict. In the near term we would expect market volatility to be markedly higher in the European currency and equity markets. In addition, higher-risk assets around the world will experience selling pressure as investors reduce their exposure to risk assets in uncertain times. Most directly impacted will be European equities, especially those in Great Britain. Financial services stocks are likely to be the hardest hit. On the flip side, safe haven assets such as sovereign debt from the U.S., Germany, and Switzerland will be in high demand.
The situation remains fluid, however the consequences will not be determined for several years. The larger risk for the global economy is the populist pressure toward isolationism.
David M. Kirkpatrick, CFP®
SVP, Portfolio Manager
Charles A. Williams, CFP®,CTFA®
SVP, Portfolio Manager
Brian A. Barker, CFP®, AIF®
SVP, Director of Asset Management