“Should the United Kingdom remain a member of the European Union or leave the European Union?”
By now, you have undoubtedly seen the news that almost 52% of UK voters spoke out in favor of leaving the European Community (the “British Exit”).
We spent Friday morning participating in multiple conference calls with market strategists and analysts at leading US and UK financial institutions so we could make sense of the Brexit vote and bring you meaningful insights into how this may impact you and your portfolio.
Here’s 10 things you should know now about Brexit:
1). The markets are overreacting to the news because the world financial community was absolutely shocked by the results. Pre-referendum polls favored a “remain” vote. That didn’t happen, and the “leave” votes won, which caught markets unprepared.
2). Nothing will happen right away. Article 50 of the EU Treaty governs the process for leaving the EU. That Article may not even be triggered until Prime Minister David Cameron steps down in October. At that point, the clock starts running for a minimum of 2 years while the UK and the EU renegotiate trade and other deals to allow an exit.
3). The best way to think of this is as a very complex, messy and expensive divorce. It will take a long time and the debate could get nasty. Expect continued volatility in financial markets as this plays out.
4). Right now, analysts believe the vote could mark a significant hit to economic growth in the UK. It may also lower growth prospects for continental Europe. Much of the disagreement is over local self-control and immigration policies, and immigration reform may impact employment markets in the UK and EU markets.
5). Analysts argue that the UK economy isn’t big enough in itself to create problems for the global economy. The UK contributes only about 4% of world GDP.
6). The EU currency isn’t being disrupted since the UK always kept the British Pound Sterling as its currency. Unlike previous conversations involving Greece, this is not a potential “pull out” from the EU currency.
7). This will likely strengthen the dollar and weaken the Euro and Pound Sterling. Interest rates in the EU and UK will probably drop.
8). The impact on the US should be muted (political ramifications aside). There is nothing to justify Friday’s market hit to US companies and values. Going forward, the US Fed will be much less willing to raise US rates, so expect rates in the US to be lower for longer (e.g. no rate hikes likely until late 2016 or early 2017).
9). The current environment favors careful sector and stock picking. An active approach may generate better results and lower risk than an index, as pricing power, financial quality, cash flow and revenue/dividend growth will help distinguish good companies from bad. This is not a good time to just be throwing money at “the market.”
10). The selloff creates buying opportunities for long-term investors. As one top economist said Friday morning, “Quite bluntly, investors make money by taking advantage of the emotional reaction of others.” The lesson? Tune out the fear and stay on course.