How investors should respond to the market’s reaction to “Brexit”
Last Updated: June 24, 2016
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.