On the off chance you hadn’t yet seen the news, late last week the UK held a referendum vote that unexpectedly resulted in the majority of voters choosing to have the UK separate from the European Union. This has been dubbed “Brexit”.
This is a big deal, indeed. There are global impacts socially, economically, and politically. The question is, of course, how much impact?
In the past few days my Inbox has been inundated with input from every research outlet imaginable, each attempting to answer this question.
I subscribe to a good amount of services that provide analysis of investment and economic developments. But it seemed like every outlet in the universe sent out some sort of a free report on this topic to drum up business. I received hundreds of unsolicited reports and articles with all these peoples’ insights on what Brexit would mean to the UK, Europe, and the world at large.
It was, let’s say….enlightening.
A lot of thoughtful insight went into most of the reports. But there were others that thought it was more important to dramatize things and even outright invent a few facts to fit their predetermined conclusions.
At times like these, it seems that those who have the strongest views on a topic are those that tend to know the least about it. The more intelligent responses are from the groups that take a pragmatic approach recognizing that we are only at the beginning stages of something that will take a long time; and valuable information will be developing and evolving as we move forward.
The one true fact in the wake of Brexit is that a lot will be learned in the weeks ahead that we can only guess about at the moment. Anyone putting forth the notion that they know exactly how this will impact the investment world is a liar. The future is always impossible to know; and with such a unique event as this, it is all the more difficult to apply past experiences to narrow down the range of outcomes.
Investors need to recognize that this is certainly going to have some impact on Europe’s economy. But they should also recognize that this impact is easy to overstate.
This Brexit is largely politically and socially charged. The reality that the UK and continental Europe are vital trade partners isn’t changing. Businesses will still want to exchange goods and services for a mutual benefit.
The bottom line is that I do believe this is a modestly negative development for Euro-zone growth, at least in the shorter term. Depending on how negotiations go, it might not be negative for very long. In fact, it could turn out to be a longer term positive. This all remains to be seen.
In other words, the economic impacts of Brexit, while they won’t be known for some time, are very possibly not that great. And there isn’t a high likelihood that Brexit changes the trajectory of the global economy in any meaningful way.
Immigration will continue to be central in this story since all the European leaders have so far agreed that access to free movement is a requirement for the type of economic free trade the UK desires.
There is a clear dichotomy for the Brits at the moment since they want to have free trade, but they also want to put curbs on the free movement of people. With all the key leaders seeming to be unified on the message that this arrangement plainly isn’t possible, this will be a sticking point in the discussions for how to move Brexit forward with as limited impact as possible.
Beyond this, however, it is being reported that no one in the region is calling for treaty change, which would have been a much larger scale reform for the UK. And it has also been confirmed that the European Council – the individual country leaders such as Merkel from Germany, Hollande from France, and Renzi from Italy – will have the political power of this renegotiation and not the institutions like the European Commission.
It should likely play out as a positive for the UK that it will be individual country leaders that work together to decide things and not the likes of Jean-Claude Juncker from the European Commission whose rhetoric has been much harsher to this point.
Meanwhile, British politics are in overdrive. There’s been no shortage of backstabbing and jockeying. At the moment, the current two leaders of the pack to replace David Cameron as Britain’s Prime Minister are both firmly committed to the results of the referendum. This means they will not look to entertain any possibility of getting back into the EU which is something a lot of people wondered about given the close call in the ballots.
So Brexit will indeed occur. And it can’t be ignored as a major development. But it can be mistakenly seen as something that is likely to be much larger than what it really is.
From an investment perspective, the results are likely to reinforce the deflationary trends that have already been prevalent. The odds of the Federal Reserve raising interest rates here in the US have likely been reduced. In fact, from a worldwide perspective, we are likely to continue to see these lower interest rates for even longer now in the wake of Brexit.
The takeaways:
• Brexit was a surprise. Investment markets don’t like surprises. They will react suddenly, just as they did upon this news. But they also tend to overreact as the fears are at their height. As the initial reaction subsides, reality can be analyzed. In this instance, the new post-Brexit reality is likely that Euro-zone growth is slightly negatively impacted. But the tone of things to this point doesn’t point to any sort of calamity in the region and even less so around the world.
• Brexit is still a fluid situation. A lot of variables exist and future leadership is yet to be determined.
• From an investment perspective, Brexit’s short term impact is likely to outweigh the intermediate and longer term impact. In other words, while this type of event matters a lot in the markets at first, they tend not to matter much at all over the more meaningful time frames.
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