On June 23rd the voters of the United Kingdom surprised the global capital markets by passing a referendum to leave the European Union … “Brexit.” Stocks fell, bonds rose and gold rallied sharply. Not surprisingly, European stocks fell the most, along with the value of the Pound and the Euro.
The near term effects of Brexit itself should be modest. We believe the vote will create a pocket of economic weakness in Europe that will have a minor, but noticeable, effect on overall global growth and inflation. It will take a few years for the UK and the EU to hash out the terms of the separation and on what basis the two can move forward. The UK and EU derive great mutual benefits from working together. It seems likely that they will try to preserve what works for everyone while restructuring what is not universally valued.
Political contagion represents a more serious concern. The UK is not the only country that has issues with the EU. There is now talk of referenda in a number of countries, including The Netherlands, France, Austria, Portugal and Italy. A simplistic analysis says that the collapse of the EU is imminent. A more nuanced look suggests that if the disenchantment is so broad, the EU will reform itself. After all, the EU is controlled by its members!
In the near term, expect uncertainty to increase. At the same time, the uncertainty could very well create some attractive opportunities to invest money at compelling prices. As the impact to global financial markets plays out, we will begin to take advantage of those opportunities.
Should you have any questions, at all, please feel free to reach out to your advisor.
Nick dePeyster, CFA
Chief Investment Officer