Despite polls predicting British citizens would vote to remain in the European Union this past Thursday, they voted to end 43 years of EU membership by a narrow margin of 52 to 48 percent.1 Market volatility and Wall Street’s immediate, negative reaction to this historic event wasn’t surprising. Investors typically don’t respond favorably to significant change or uncertainty.
While the long-term effects of the vote remain to be seen, an article in Friday’s New York Times said few expect Britain’s departure to set off a long-term financial crisis like the one that began when investment banking giant Lehman Brothers collapsed in 2008.2 The United Kingdom is still part of the EU. It has two years to negotiate the terms of its exit from the time it notifies the EU it intends to leave. If Britain strongly disapproves of the deal, it could seek a second vote about leaving and potentially reverse its decision. If the deal stands, trade and financial agreements would likely be phased out rather than terminated.
Britain may face a recession. But the effect of such a decline on other nations is difficult to predict. Although Britain’s economy is ranked fifth globally, it accounts for less than 4 percent of total global GDP.3 The impact on international corporations also remains to be seen. To discourage such departures, Continental Europe is warning of ramifications on British exports. But it should be noted Continental companies will still want to trade with Britain’s large, wealthy market.
The referendum’s outcome may reflect a populist movement toward more protectionism and less global integration. How Britain fares in the coming months and years may influence whether this movement grows. On the flip side, Scotland’s leaders have warned of a potential renewed bid for independence so it can remain with the EU.
When the markets react emotionally, it’s imperative to think rationally. It may be a good time to review your portfolio, assess your current situation and evaluate your risk level. As always, I am monitoring the market conditions. Please feel free to contact me if you have concerns you want to discuss.
1. USA Today, June 24, 2016, www.usatoday.com/story/news/world/2016/06/24/britainvotesleaveeuropeanunion/86324662/
2. New York Times, June 23, 2016, www.nytimes.com/2016/06/25/business/international/brexit-financial-economic-impact-leave.html?_r=1
3. The Economist, June 24, 2016, www.economist.com/news/finance-and-economics/21701292-uncertainty-abounds-expect-global-chilling-effect-investment-why-brexit
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