How investors should respond to the market’s reaction to “Brexit”

In a historic vote, the people of the United Kingdom (UK) have voted to leave the European Union (EU), and markets around the globe are moving wildly today. "Brexit" impact on investorsThe British Exit or “Brexit” from the EU has several implications long and short term, but first it is important to understand what happened and why. The vote is a culmination of anxiety from the British people about relinquishing control of their laws to the EU, which is based in Brussels. The UK had very little control over policy in general, but immigration and trade were two of the main sticking points. While immigration has boiled over of late, with the mass influx of people from the Middle East, it has roots further back to 2004 when several of the former Soviet Union satellite countries joined the EU and many of their people immigrated to the UK. The EU allowed for refugees to immediately claim unemployment benefits with no requirement for living in the host country for any period of time. This cultural issue now created an economic problem for the UK.

In February of this year, Prime Minister David Cameron renegotiated, and received concessions from EU regarding several of the issues that were important to the people of the UK. However, the populist movement was already well underway, and the timeline for this historic vote was moved up from 2017 to yesterday. The arguments for leaving the EU were framed around immigration and taking control of the UK’s future without interference from Brussels. The arguments to remain in the EU were framed around impending economic chaos and the safety of being in a large group for military purposes.

So now what?

For the UK there is little that is clear, other than they will be leaving the EU. The timeline to leave may be at least two years, so the UK leaders will start the negotiation process to withdraw from the union. However, Prime Minister David Cameron, who rallied the “Remain” cause has decided to resign by October. So who exactly will be negotiating the exit is up in the air. Boris Johnson, former mayor of London, and Nigel Farage, leader of the UK Independence Party, are the two most prominent “Leave” campaigners and are the likely choices to supplant the outgoing Prime Minister Cameron. It remains to be seen how the negotiations will play out, and the markets will likely be hinged on news as the negotiations develop. Long term, the vote exposes a lot of cracks in the EU, as populist parties in Spain, France, Germany, Netherlands, and more are now calling for referendums in their own countries. Meanwhile, Scotland is going to hold a referendum to leave the UK for the second time since 2014. The Scottish people would like to be in the EU. Even had the vote been for the UK to remain a part of the EU, the renegotiation from February was causing other countries to think about renegotiating their rights within the EU. The EU leadership is already talking about changing the framework for the union to quell the populist movements.
While markets around the world are having knee jerk reactions – equity markets falling, while safe havens like Gold, U.S. Dollars, and Treasuries are rising – it is important to remember that the results from this vote will manifest over time as the negotiation process plays out. London is the world’s largest financial hub, with currency trading dwarfing New York, the closest rival. The UK remains a major economy, there is still a lot of trade emanating from the country, and it still will be a major financial center. So while the negotiations for departure will be tedious, the thought of a total lock out is hard to imagine.

What does this mean to you?

In the short term, you may expect to see all markets fluctuate and show a lot of volatility while market participants digest the information and reassess their investment positions.

  • Equity markets are dropping globally today, and for some this may present a buying opportunity.
  • Fixed Income markets will be more segmented, with Treasuries and US Government-backed issues likely to rise, while corporate debt and high yield markets are likely to mirror the equity markets to some degree.
  • Commodities, such as oil, may decrease as investors globally question the value of the Euro and the Pound Sterling and rush to get into the Yen and the Dollar as the safe haven currencies.
  • Everything priced in Euros and Pounds suddenly may become more expensive while everything priced in Dollars and Yen may become less expensive.

It is important not to panic and sell into the news, and maintain a focus on long-term goals while staying diversified. It is also important to keep in mind that no one knows the long-term implications of the vote yet.

Before the negotiations can even begin, the UK needs to elect a new Prime Minister and develop their plan. The long-term demise of the EU may in some ways be the decoupling of healthy economies from less healthy ones within the Eurozone and may be a long-term positive. With each country able to control their own currency, the world would not be posed with the risk of a country like Greece taking down the whole 28-member Euro block.

Markets are cyclical and we believe that volatility will continue. It is imperative for investors to understand their risk tolerance and review their portfolio to ensure they are diversified appropriately. Our Investment Services team can help identify investments and portfolio allocations that are in line with your retirement plan goals. To learn more, please contact a Pension Consultants Investment Consultant at 800-234-9584 or email us at investmentservices@pension-consultants.com.