Don’t Sweat the Brexit

Image showing the Union Jack and European Union flags overlaid on a cityscape, with financial graphs and coin imagery, symbolizing economic themes related to the UK and EU.

Many of us woke up this morning to a new global political and economic development: Brexit.

As you undoubtedly know by now, “Brexit” refers to a British exit from the European Union. Predictably, markets worldwide have responded to the United Kingdom referendum in favor of Brexit with varying degrees of volatility and distress. And some of our clients have told us they are worried, not only about the short-term but also about the potential long-term fallout from this move.

The short-term market volatility, of course, is predictable. Mr. Market never likes uncertainty. It seems to us, however, that the long-term concerns are likely to be a bit overblown. Current thinking may even underestimate some of the potential advantages that an unconstrained and nimbler Britain might reap.

In such matters, however, we also actively consult leading experts and thinkers. One such thinker and writer we respect had the following to say this morning:

“The important thing to understand is that the current market disruptions represent an emotional roller coaster, an immediate panic reaction to what is likely to be a very long-term, drawn out, ultimately graceful accommodation between the UK and Europe. German companies are certainly not 7% less valuable today than they were before the vote, and the pound sterling is certainly not suddenly a second-rate currency. When the dust settles, people will see that this panicky Brexit aftermath was a buying opportunity, rather than a time to sell. People who sell will realize they were suckered once again by panic masquerading as an assessment of real damage to the companies they’ve invested in.

“What happens next for Britain and its former partners on the continent? Let’s start with what will NOT happen. Unlike other European nations, Britain will not have to start printing a new currency. When the UK entered the EU, it chose to retain the British pound—that that, of course, will continue. Stores and businesses will continue accepting euros.

“On the trade and regulatory side, the actual split is still years away. One of the things you might not be hearing in the breathless coverage in the press is that the British electorate’s vote is actually not legally binding. It will not be until and unless the British government formally notifies the European Union of its intention to leave under Article 50 of the Treaty of Lisbon—known as the “exit clause.” If that happens, Article 50 sets forth a two-year period of negotiations between the exiting country and the remaining union. Since British Prime Minister David Cameron has officially resigned his post and called for a new election, that clock probably won’t start ticking until the British people decide on their next leader. For the foreseeable future, despite what you read, the UK is still part of the Eurozone.

“Meanwhile, since the Brexit vote is not legally binding, it’s possible that the new government might decide to delay invoking Article 50. Alternatively, Parliament could instruct the prime minister not to invoke Article 50 until the government has had a chance to study further the implications. There could even be a second referendum to undo the first.”

The important thing for everybody to remember is that, in the short-term, global trading desks are engaging in sophisticated betting of various types and not in fundamental investing decisions. As for the longer-term, the Brexit is not an event, but will – if it happens at all – be a long and drawn-out process. And since neither side in the discussion will benefit from economic disruption, both UK and EU officials are likely to try to maintain as much economic cooperation as possible.

If you have other questions, or specific concerns about how all of this affects your specific investments, please feel free to contact our office.

Image by Octus Photography from Shutterstock

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