Britain voted 52% to 48% to leave the European Union, which has sent global markets into temporary turmoil, and has caused the British pound to plummet. Here is what you need to know from a financial perspective:
While the polling prior to the vote was very close, this week’s polling showed a high likelihood that Britain would remain part of the EU. The “surprise” of the Brexit vote is why the markets are dropping today. This is simply how markets react to surprise news, especially when it creates a lot of unknowns.
David Cameron had called for the referendum vote, and was in favor of remaining part of the EU. He will resign in October to make room for someone else to lead this change for Britain. This, of course, creates another unknown. The first step is to invoke Article 50, which allows a member state to depart the EU. This process is formally limited to two years, but the expectation is that the unwinding of this relationship will take many years, and it will likely be a messy divorce. Topics to be negotiated include trade, business, and political relations, to name a few.
This result of this vote is a significant vote of “no confidence” for the EU, which began as a project to unify the continent and to prevent World War III. With that noble background, the economic benefits of the EU have not measured up to expectations, which is one of the reasons that Britons voted to exit. While much speculative analysis has been done in favor of both “Brexit” and “Bremain” (the other side of the vote, which would have resulted in Britain remaining a part of the EU), the objective analysis widely predicts that England will have an economic setback as a result of the vote. Additionally, the IMF has now set the chance for a global recession at more than 50%. European leaders will meet this weekend and next week to discuss what this means going forward and how they will work with Britain, as well as how they can move forward to provide the strongest economic results for Britain, the EU, and the global economy.
By now, my clients are familiar with this phrase: “The financial markets hate uncertainty more than anything.” Today is evidence of that. The Brexit leaves a massive chasm of unknowns for Britons and world economies. While the current market turmoil is to be expected, I expect to see it subside over the short-term. However, we will be altering our international outlook and exposure in response to the change.
I will provide more commentary on the longer term effects of the Brexit decision in my quarterly market commentary in July. I will be addressing how we expect for the breakup to affect markets, what we will be looking for in international markets and economies as we make decisions regarding our allocations, and also whether the US could potentially benefit from the Brexit.