Broker Check

Brexit—What are the Implications?

August 18, 2016

So far only one client has called with concerns about Friday’s market decline (June 24, 2016) following the United Kingdom’s vote to exit the European Union (EU)—also known as Brexit (British Exit). I have received dozens of commentaries from an equal number of money management firms, and this summary will help to frame the issues for investors.

Worldwide market reaction has been universally negative with strong downward pressure on stock prices. This is not surprising as expectations of a Remain vote drove prices higher in the week leading up to the vote on Thursday, June 23, 2016. With many institutional traders caught on the wrong side of the vote, they are scrambling to unwind losing positions.

Short-term we can expect greater volatility world-wide as markets try to digest the implications of the Brexit vote. It is important to note the process of exiting the European Union will take upwards of two years. With that much lead time, there will be concurrent and related issues that will also capture investor attention. For example, what terms will the UK be able to negotiate with the EU in their planned departure? Germany has expressed a desire for continuation of free trade between the EU and the UK. However, the “eurocrats” in Brussels who oversee the European Union may play hardball as a way to discourage other countries from exiting, like Spain, Italy or Greece.

Will the UK slip into recession and will that contribute to a European recession, or even a global recession? A slow-down in the UK is a near certainty, and may leak into the broader EU. However, signs of strengthening in the world’s two largest economies, the US and China, may be enough to reduce the likelihood of a global recession. Moreover, weakening European currencies in the face of these uncertainties will promote exports and a more favorable trade environment for companies there.

The most important thing to remember during periods of great uncertainty is that historically they offer the best opportunities for long-term investors. According to J.P. Morgan, over the past 36 years, the market on average has experienced an intra-year drop of -14.2%, yet has managed to post positive returns in 27 of those 36 years. This strongly suggests those investors who were able to stay the course experienced much higher returns than those who sold when the market was down. This is why we hire expert money managers, to exploit opportunities for the benefit of our clients and their long-term objectives.