The Brexit vote was a referendum posed to the British people to either leave or stay in the European Union. If the “leave” vote won, Britain would leave the EU by 2019. If “stay” had won, Britain would have remained in the EU. As we now know, the majority of the British citizens voted to leave the EU.
The two main reasons cited by the “leave” camp are the burdens of EU regulations, particularly on small and medium sized businesses, and the free migration of immigrants. The “leave” camp wanted more control over their own affairs.
Britain is different in the EU because they have maintained their own currency, the pound sterling, while having active membership with other EU nations. Trade and border movement is simple and easy. Britain has full access to the entire EU market. The “stay” camp maintained that Britain would be worse off economically out of the EU.
Now that Britain is leaving, there will be a significant amount of uncertainty in the markets.
Likely both the pound and the euro will have their exchange rates affected. Money will likely flow to the safety of bonds, possibly U.S. Treasury bonds, which pay higher rates than several countries’ bonds at this time, such as German or French bonds.
But the vote is advisory and not legal: the legal deal still needs to be worked out by 2019. There is already a change of politics in Britain, as Prime Minister David Cameron has announced he will resign.
This opens a keg of other questions about the EU, like whether Scotland or Ireland try to join the EU, for example, or whether the Brexit is an unraveling of the EU. Britain would likely have to make new trade deals with the EU and elsewhere.
So short run turmoil, and maybe opportunity. Think about Detroit and downtown real estate: the point of highest uncertainty was also a point of opportunity. The same applied to the Great Recession: many of us wish we’d bought a house or a stock or a mutual fund in 2009. We think that economies work on their own power. Under that theory, the British economy will work itself out, as will the EU. To be sure, the EU hasn’t been the greatest example of a Union.
Ultimately, Britain has survived much more than leaving an agreement. Economies and societies are resilient and will find equilibrium.
There’s a way we tend to think that makes us pay attention to the most recent thing. Right now, we’re talking about the Brexit. A few years ago, it was the Greek exit. Before that we had Y2K and NAFTA, whatever disaster of the day was looming. The real story was if you kept calm and stayed in the market, you were rewarded. If you tried to time the market, you had the daunting task of figuring out exactly when to get in and when to get out, which requires substantial analytic skills, not to mention luck. Keep calm, seek opportunities.
Like many of the prior pieces of financial angst, the Brexit may be much ado about nothing.
Leon LaBrecque is managing partner & CEO of LJPR Financial Advisors.