“Brexit” Shocker: Should Investors Head for the Exits?
British voters shocked the world when they voted to exit the European Union.
The surprise outcome was followed by British Prime Minister David Cameron’s announced resignation. Britain is expected to formally announce it will withdraw from the EU, beginning a two year window for the United Kingdom and the European Union to negotiate new treaties and agreements. A new Prime Minister will be elected in October.
The initial reaction in global capital markets was strongest in currencies – the British pound and the Euro have both fallen sharply against the US Dollar. European stocks have also dropped sharply in early trading. In the U.S., the reaction has been less extreme, with the S&P 500 dropping 3-4%. Still, a 500 point drop in the Dow Jones Industrial Average is unnerving.
What it all means
The full outcome of the “Brexit” will take years to develop, but in the short term it brings great economic and political uncertainty to Britain, and ultimately to all of Europe.
All major trading agreements between Britain and the EU member countries will need to be renegotiated, as well as countless safety, environmental and commerce standards that affect all companies doing business in the U.K. A new prime minister will need to be elected, and negotiations around the EU separation may not begin in earnest until then. Once begun, the negotiations may be long and contentious, as they will have implications for the future of the European Union. Thankfully, the UK and the EU already have separate currencies and separate central banks, which should help limit financial disruptions.
The question hanging over the markets is – how will this affect the rest of the world? Will it have a ripple effect that prompts other EU countries to leave the union? What longer term effect will the nationalist surge in Britain have on globalization? Questions like this will surely mean more volatility going forward.
Balanced portfolios are built for long term success
With such a big drop in global equity markets, it’s tempting to follow the herd of investors heading for the exits. However, it is important to remember that a properly diversified portfolio includes investments designed to weather uncertain times like these. We have invested our clients in broadly diversified securities, and we’ve positioned portfolios to benefit from the longer-term themes we see in the investment markets.
The most important advice we can offer is to not get caught up in the panic and make emotional investment decisions. The dust has not yet settled and will not settle today, nor next week. It will take time for markets and policymakers to make sense of “Brexit” and price securities accurately. In the meantime, we will continue to invest as long-term investors, focusing on those instruments that offer the best possible opportunities for our clients over their investment horizons. Let your long-term plan guide your investment decisions. It is not the easiest to keep in mind in the moment, but it is disruptions like these that often create key long-term success.
Please stay tuned for more information from us as the “Brexit” situation unfolds. To discuss how your portfolio can best weather uncertain times like these, please contact us.