A Nation Divided: First Reactions to U.K.’s vote to “Brexit” from European UnionSubmitted by Younity Wealth Partners on September 29th, 2016
Updated: June 24, 2016 by Kara Downing, CFP®
More than 30 million people (a 72% voter turnout) from England, Scotland, Wales, and Northern Ireland went to the polls this past Thursday to decide whether Britain would remain part of the European Union (E.U.) or be the first country to leave the 28-member bloc. After a neck-and-neck campaign highlighting the stark contrast in opinion, the U.K. voted to exit (or “Brexit,” as it has been informally named) the E.U. by a final vote of 51.89% to 48.11%. Scotland, Northern Ireland, London, and other major cities in England had Remain majorities, while Leave won the majority of votes in Wales and England. The decision quickly led to the resignation of U.K. Prime Minister David Cameron, a strong proponent of the U.K. remaining part of the E.U., who is expected to leave his post sometime in October.
Here is a map illustrating the division of votes based on geographic location:
Markets were not expecting either outcome, pricing in only a 25% chance that an exit would occur. The response to this unprecedented occurrence prompted a sharp decline in global stock markets. The selloff may have been exacerbated with the vote results coming on a Friday, with investors wary of going into a weekend with too much uncertainty, causing them to scramble to get their ducks in a row before markets close. U.S. stocks followed global market declines with the Dow ending the day down 611 points, or over 3.4%, while the S&P 500 lost 3.6%. The Nasdaq composite index dropped 4.12%, and into correction territory -- or down 10% from its recent high. Bank stocks took a particularly heavy hit as multiple lenders across Europe declined more than 15%. Central banks in the U.S., U.K. and the eurozone say they are ready to provide support in the short-term, as needed, but a longer-term resolution could take several years.
Scotland's government began moves Friday to hold a new referendum on independence from the U.K. after the "Brexit" vote, saying it faced being taken out of the E.U. against its will. 62% of Scots and nearly 56% of voters in Northern Ireland voted to remain in the E.U., suggesting the U.K. faces strong internal headwinds.
Another unknown is what may happen with the other countries that are “on the fence” as to whether they will exit the E.U. This could put the European Central Bank (ECB) in a difficult position to continue their quantitative-easing program of buying the bonds of countries that may choose to leave the Eurozone. A French exit ("Frexit") could have a greater impact than the recent Brexit on markets, with an ECB that may be unable to effectively intervene. Some experts caution that fears of the E.U. falling apart are overblown. After all, the U.K. has always used the pound as its currency. Other countries like France would have to scrap the euro and reintroduce their old currency, a much more difficult transition than what the U.K. must navigate now.
It’s likely that it will take some time for the shock to fully work through the economic, financial and political systems both here in the U.S. and abroad. Continued uncertainty and currency volatility are to be expected, particularly some weakness in the euro, and a rally in the U.S. dollar may negatively impact our exports. As foreigners flee to safety in U.S. Treasurys, short-term rates will continue to be pushed lower. If the volatility in markets from the Brexit continues, and if U.S. consumers pare back spending, and employers slow down hiring even more, the Fed could be looking at zero rate hikes in 2016. In fact, markets are starting to increase their expectations for a rate cut this year.
One thing to keep in mind as we watch this scenario unfold is that we prepared in advance an investment strategy for you that did not depend on us guessing correctly the outcome of the Brexit vote, or any of the other big upcoming events this year for that matter. Your portfolio is globally diversified to help you weather times like these, and the markets' presumed drop today (as well as those that may occur in the coming weeks) does not have much to do with the fundamentals of economic and business markets and should not be extrapolated too far into the future. No two market shocks are the same, but in some of the other shocks since the 2008-2009 financial crisis, markets have recovered in three to four months. While we do not have a crystal ball, experience reminds us not to panic in the wake of a market uncertainty and avoid making decisions with long-term ramifications based on short-term events.
As longer-term investors, we remain committed to our overall strategy of diversification and proper asset allocations intended to withstand short-term market fluctuations. That is not to say that we will bury our heads in the sand and ignore the current challenging landscape in Europe and its effect on global investments. Since nothing will change right away, a market overreaction presents an attractive buying opportunity.
Should you have any questions about the recent Brexit or its impact on your portfolio, please do not hesitate to reach out.