On June 23rd, the citizens of the U.K. voted to leave the European Union (EU). The EU is a political and economic union of 28 countries in Europe that spans areas including trade, security and migration among others.
This surprise outcome stunned the world, caused world stocks to tumble and prompted the U.K.'s Prime Minister, David Cameron, to resign. The following is our take on the situation and how it impacts U.S. Investors.
Why did the British Voters decide to leave?
- Immigration: According to Bloomberg, roughly 500 people every day enter the U.K. and become eligible for employment and subsidies. The populist movement amongst many Brits wants this to come to an end.
- Cost: Britain can stop sending £350 million, equivalent to half of their entire school budget, to Brussels every week. This money could be spent elsewhere.
- Control: Leaving will return control over employment law, healthcare, and safety/security. They could renegotiate trade agreements and have a bigger voice in international affairs.
What is the timeline?
Most likely, this process will take at least two years. No country has ever left the EU before so they need to figure out how to do it.
Are we worried?
We are not worried and do not expect this to cause any real problems for three reasons:
- There is no way that the UK separating from the EU can drive the world's largest economy into a recession. This will have a very limited impact on the U.S. economy.
- Several countries in Europe are already not members of the EU and are doing fine (Switzerland for example). We suspect that this outcome may actually be better for the U.K.'s economy because the money they were spending to be in the EU can be put elsewhere. Also, expect the UK to sign new trade agreements in the coming years.
- The volatility has to do with trades unwinding and nothing fundamentally speaking. Traders were betting on the direction of the vote, and now they have to cover positions. Most of this will be done in the currency markets but since financial markets are interrelated these days, stocks will see some volatility as well.
Keep in mind that a lot of the fear talk about the UK leaving is nothing more than self-interests playing out. For example, Jamie Dimon (CEO of JP Morgan) said it would be a bad outcome because he likely does not want to have to spend money to move an office from the UK to Europe. Our Government's view was that it would be bad because politicians probably do not want to have to draft new trade agreements because that takes time and money. Simply put, be very careful what you read because many of the big names saying this is disastrous are nothing more than self-interested.
What is the exposure in our clients' portfolios?
Very difficult to quantify because there are so many unknowns. Direct exposure is quite small given we do not own many stocks or positions that are going to feel any immediate impact. The real impact is going to be anything related to the British pound, and we do not trade currencies. That being said, this type of volatility will likely cause prices to feel pressure for reasons with no logic or reason.
What does this volatility mean for investors?
This is nothing more than the typical emotional component of financial markets taking control for a temporary amount of time. Keep in mind that world equity markets fell over 20% in a matter of six weeks to start 2016, but then they (1) recovered, and (2) never drove the world economy into a recession. This is just another example of how emotions can take over for a brief amount of time but are never strong enough to derail large economies.
What should I do next?
If you're an SHP Financial client, the custom-designed income and investment plans we put in place for you within your Retirement RoadMap are specifically designed to absorb the impact of these types of events which create volatility. Should you have any questions, please feel free to call our office at 508-746-2400.
If you are not an SHP Financial client and are feeling concerned about the potential impact of the Brexit on your investment portfolio, we invite you to come in for a complimentary portfolio analysis. During this no-obligation "Retirement RoadMap Review" we'll:
- asses your current portfolio to see if you are at risk of being impacted by the Brexit
- provide you with an investment fee analysis
- provide you with a retirement income and expense analysis