Implications for Investors from the “Brexit” Vote
What happened on June 23rd?
On June 23rd, the United Kingdom (comprised of England, Scotland, Wales and Northern Ireland) voted through a public referendum to leave the European Union (EU). In a deeply-contested and politically-contentious vote, the citizens of the UK voted by a 52 to 48 percent margin to leave the EU, sparking immediate financial market volatility and wide-ranging discussions regarding the long-term global impacts. The vote is not binding; therefore, we cannot rule out wider political ramifications ahead or a second referendum. For example, immediately after the results came in, British Prime Minister David Cameron announced that he would be resigning from his position. He will continue as Prime Minister for three months but stated that the “will of the British people must be respected.”
A full review of the topic is beyond the scope of this note and any results from this action will unfold over years and decades, but our goal is to provide a substantive summary of relevant topics for investors.
What is the EU and “Brexit?”
Before we review the potential implications of the UK’s vote to leave the EU, it is important to define a couple of terms (i.e., what is the “EU” and what is “Brexit”?).
- The EU is comprised of 28 member countries, which are subject to the treaties of the union, including both the benefits and obligations of membership. Member states range from larger economies, such as Germany, France and the UK, to smaller and in some cases, economically struggling countries, such as Greece and Ireland. The origins of the EU date back to a post-World War II environment, with overriding goals of economic and political cooperation. By the 1990s, the EU had grown to include over 500 million citizens of Europe.
- On June 23rd, driven by a complicated web of factors, the UK voted to remove itself from the EU, thereby triggering an intensely complicated set of issues on the world economy, ranging from economic and financial implications to national defense, immigration, border controls, refugee crises, educational systems, social services, etc. (“Britain” plus “Exit” has been shortened into the new acronym, “Brexit.” The “stay” crowd was hoping for a “Bremain” vote.)
What led to Brexit?
While the factors leading up to the Brexit departure are complex, the overall theme of the movement, and the resultant concerns of the Bremain crowd, is centered on an anti-globalization backlash around the globe. Recent slow growth and labor market challenges in the global economy have left many Western citizens disillusioned with the supposed benefits of free trade, globalization and open markets. The situation draws some parallels to the anti-immigration fervor currently seen in American politics.
What does this all mean?
Since the actual Brexit departure will unfold over a two-year EU-mandated negotiation period, it is too early to evaluate the true impact of Brexit on the UK and global economy. However, topics to follow will include, but not be limited to, potential follow-on departures from other countries, a rise in protectionist measures from major economies, an increase in anti-globalization sentiment across Europe and the U.S., renegotiated trade deals across Europe, the waning influence of London/UK as a major financial center, possible retaliatory measures from the likes of Germany and France, and potential impacts on global interest rates.
In the wake of the historic referendum, the magnitude and potential consequences of the vote came into focus. On one hand, the decision sparked some "voter's remorse" within parts of the UK as some Brexit supporters developed "Bregret" and grew concerned about the outcome; while, on the other hand, the anti-EU movement fueled the fire of a potential move by Scotland to leave the UK itself, noting that a similar referendum failed in 2014.
Not surprisingly, market reactions on June 24th were swift and significant: equities were down across the globe, oil was down, gold was up, and there was a flight-to-quality with investors moving to bonds. The British pound dropped to a 30-year low, as investors digest potential implications for a stand-alone UK economy. The global markets reacted strongly, because it was widely anticipated that voters would choose to remain.
Going forward, the Brexit move is likely to put downward pressure on interest rates as it could contribute to slower global growth, thus pushing yields on sovereign bonds in Europe and Japan further into negative territory.
For individual investors, while it is important to understand the general decision and context of your investments, it is more important that you follow important personal investment guidelines, including matching your investment strategy to your risk tolerance, personal goals and time horizon. Investment decisions should not be guided by short-term, reactionary events that are out of your control; instead, they should be guided by a thoughtful long-term plan that is focused on a series of time-dependent goals, your risk tolerance and your comfort level with market volatility.
The Brexit vote has been labeled by some as the biggest event in European politics since the fall of the Berlin Wall. The implications are unpredictable and will play out over years and decades. The key for investors will be to assess the situation and define your ability to match your investment/retirement planning strategy with your long-range plans, while not trying to outsmart the market with short-term decisions. Brexit has proven again that market volatility is a constant and individual investors are best served by long-term planning – not short-term timing and predictions.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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