Brexit Aftermath Part One
Written by Gary Silverman, CFP®
I’m writing this on the weekend after the United Kingdom voted to leave the European Union. That vote ended a 43-year long union and took most people by surprise. Heck, early numbers showed the “stay” vote winning early in the day. Over two-thirds of voters thought the measure would fail. Even the majority of the pro-leaving voters thought it would fail.
While the result of the vote was a surprise, once the results were in the aftermath was very predictable. Markets are made by people’s reactions and when it comes to investing, people don’t like change. This was change. Global market fell to their lowest level in months. London’s stock exchanges were off 4-5%, Germany’s DAX lost over 7%. Here in the U.S. we saw a drops of 3-4%. While I don’t know when I’m writing this, you’ll know if the carnage stops here or keeps going for a while.
Just as people don’t like change, they fear the unknown. We don’t know how this will play out as it has never happened before. That’s why no matter what is going on in the markets now, this process will take years of fits and starts especially early on. The markets love bouncing between overblown terror and ecstatic optimism. You’ll see both. For now, overblown terror.
I rather doubt that German corporations were 7% less valuable because of the vote. I doubt ours were 3% cheaper either. Is this a buying opportunity? Sure, I’m just not sure when. Nobody knows exactly how the long-term prospects of Britain, the EU or American companies doing business across the Atlantic will be impacted by Brexit, but it would be unwise to assume the worst so quickly after the vote.
While there is no need to panic, change—a big change—has occurred. But first let’s look at what is not happening.
First, Britain’s currency isn’t changing from the Euro. It never was the Euro. When the rest of Europe was going Euro, U.K. stayed on the Pound. So Europe is used to dealing with the Pound and G.B. is used to dealing with the Euro.
Next, the vote does not actually have U.K. leave the E.U. Rather it is the voters telling Parliament that’s what they want. Parliament actually doing something will take some time as the leader of the current government, David Cameron, resigned and called for new elections. Once they sort all that out, Parliament will then invoke Article 50, sometimes known as the “exit clause.” But that doesn’t have the U.K. going anywhere either. Rather it starts a two-year series of negotiations between the U.K. and the rest of the E.U.
During this process, lawyers from both sides of the channel will take each piece of the trade relationship (which is what the E.U. is) and negotiate new deals. Part of this includes travel, worker rights, and a myriad of other immigration issues. You’re probably looking at 5 years or more for all the parts to be hammered out before things get back to normal.
That said, what about us? How does the U.K. departing the E.U. affect the U.S.? Come back next week.
This article was published in the Wichita Falls Times Record News on July 3, 2016.