Excerpt from an email to clients regarding the so called ‘Brexit’:
Yesterday voters in the U.K. went to the polls to decide whether to stay or leave the European Union (EU) – coined ‘Brexit’ by combining “British” or “Britain” and “Exit.” A 52% majority voted to leave the EU. As a result, Prime Minister David Cameron resigned this morning, and British currency (commonly referred to as “the pound”), as well as equity markets around the world tumbled. While most ‘experts’ and TV pundits had predicted Brits would vote to stay, they woke up this morning scratching their heads wondering what had happened. In fact, markets had rallied just yesterday in anticipation of a ‘stay’ vote.
What it means for investors:
- First, it means very little if you have a well diversified portfolio. In fact, while stocks slid this morning, US Treasuries, Bonds, and Gold rallied dramatically.
- Second, the British economy makes up only 4% of the global economy, therefore the negative effects of an economic slowdown in the U.K. as a result of the exit will likely have very little global economic impact.
- Third, the process for the exit will take years as trade agreements, treaties, and other red tape will have to be cleared before there will be an actual exit. This means that while markets may overreact in the short term (as they did after 9/11, the 2008 financial crisis, the Greek default, etc.), that things will eventually calm down and cooler heads will prevail.
The good news:
- It’s a great time to travel to the U.K.! With the dollar rallying so strongly against the pound, that trip to England you’ve always wanted to take just got a lot more affordable 😉
The truth is the reaction of the media and therefore the markets when an unexpected event such as ‘Brexit’ happens should actually be expected. Markets hate uncertainty as uncertainty breeds volatility, but the media relies on events like these to goose ratings, page views, etc. so saddle up as this news cycle is just getting started. In the grand scheme of things however, especially for long term investors, this should be viewed as a non-event.
The ‘Brexit’ vote means there is still a lot of questions regarding the future of the EU. Will other EU countries now push for their own referendum? It also remains to be seen who will guide the U.K. through the likely mutli-year exit process now that Prime Minister Cameron has resigned, but someone will step in to fill the void – and our bet is the sun will indeed still rise in the morning. Stay tuned…