A Few Thoughts on Brexit

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Let us add a few brief thoughts to the many comments that you have undoubtedly received regarding Brexit.

Background

Coming into last week investors were confident that the “Remain” vote would win and as a result, global equities and commodities rallied through Thursday. While a “Remain” vote win seemed a certainty until as late as Thursday evening, Britain delivered its historic “Leave” decision early Friday morning to the surprise of the world.  Following the announcement of the referendum results, current UK Prime Minister David Cameron resigned. While these developments are dramatic – and certainly represent extraordinary circumstances – they do not immediately trigger the separation from the bloc.

Not So Fast

The actual decoupling process can only begin, if and when the British government invokes Article 50, an unused provision of the EU’s governing treaty that sets forth the terms of any withdrawal process. Prime Minister Cameron’s resignation has deferred to his successor the decision to trigger Article 50, effectively putting the task on hold until at least this fall.

Brexit Contagion

The Brexit vote fuels anti-EU sentiments which will give rise to challenges across the EU. Elections in other EU countries including France and Germany may further fracture the bloc which in turn will trigger more bouts of volatility across the globe.

Economic Effects

Over the short-term, uncertainty stemming from Brexit is likely to affect economic growth in the UK and Eurozone. Interestingly with about 30% of the UK’s GDP derived from exports, pushing down the value of the British pound the Brexit vote did more to make the UK competitive in the global economy then all of the quantitative easing measures implemented by the Bank of England since 2009.  This dynamic helps to explain why the UK stock market has fared better than those across the rest of Europe despite UK-centric headlines surrounding Brexit.  However the effect of global market movements caused strain in Germany and outright capitulation in peripheral Europe.  In contrast, the US equity markets have remained somewhat resilient with Friday’s decline only a 4% drop from the US equity market’s all-time high.  While the US is certainly not immune to last Friday’s events, the epicenter is clearly in Europe.

Conclusion

As Europe reshapes its relationships, we will be faced with this current uncertain situation for some time to come. 27 nations, most of whom don’t like each other, but who need to find a way to co-exist to each other’s economic benefit.  What a challenge!!  The EU was the most recent attempt much like our own Articles of Confederation which were adopted in 1781 by the emerging, but not exactly united, states of America.  The Confederation didn’t work and by 1789 it ended.  So now with Brexit we are faced with an extended period of negotiations as the parties try to work out these new relationships.  It is strikingly similar to the course of many labor negotiations:  sometimes it takes a strike (read ‘Brexit’) to bring both sides to the bargaining table to work out a meaningful solution.  Only time will tell with the results of Brexit.  But any meaningful solutions will not happen without a lot of fits and starts.  Hopefully individual country economic self-interest will prevail. In the meantime the markets, which abhor unpredictability, will remain volatile.  The only certainty is that the atmosphere of tremendous uncertainty will continue.

Stephen Wells, Founder & Managing Director, The Solaris Group LLC

About Jim Jeffery, CFA

Jim Jeffery, the founder and principal of Jeffery Asset Management has joined Solaris Advisors LLC as Managing Director where he will lead the non profit senior living effort. Jim is a Chartered Financial Analyst (CFA) with more than 20 years experience in the financial services industry. Have a question about your financial plan? ASK JIM

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