The British referendum vote on June 23rd was not only the biggest event of the week; it may turn out to be one of the biggest events of the decade, depending on how things unfold from this point forward. The British decision to leave the European Union looks likely to have put an end to a 43 year membership. Importantly, when events of this magnitude happen, it makes the most sense to take a cold shower, evaluate the landscape, and resist making any rushed investment decisions. It was probably a good thing, in hindsight, that the results hit global markets on a Friday. The coming days and weeks are likely to provide additional clarity on the path forward. This week alone, there are several key meetings set to discuss Brexit strategies including the European Commission (Wednesday), the European Union Assembly (Tuesday), and key politicians Merkel, Renzi, & Hollande (Monday).
The surprising vote to leave the European Union will undoubtedly trigger significant political and economic ramifications, but specific investment implications will take time to answer. As negotiations begin, there are several broad conclusions that are likely to take shape, some of which may have profound political, economic, and investment implications. The first major consequence is that the decision strikes at the stability of the European Union and may ultimately alter the global distribution of power. Instability in such a long standing Western institution and shifts in the global pecking order do not inspire confidence in the financial markets. While not our base case, the remote possibility of the disintegration of the EU would massively increase geopolitical risk. Second, the uncertainty and the ‘what now’ messaging currently prevailing is not friendly to markets. We do expect many of these clouds to clear as discussions begin and alternative arrangements surface but these will likely take time and therefore allow the uncertainty to linger. A colleague remarked this weekend that “the LEAVE voters look like the dog that chased the car and didn’t know what to do once it caught it.” Negotiations must be completed for a formal exit to occur no later than two years from the date the U.K. invokes Article 50 (the exit article).
Perhaps the most intriguing and longer term take away of this outcome is the extent of widespread disbelief that populism could win any major vote in a major country. Very few saw this coming. In fact, elections in Austria, Portugal, Italy, and Spain arguably received more attention that the British referendum during the first half of the year. The past three decades of globalization, free trade, low taxes, budgetary discipline, and laissez-faire policies are being put to task in some of the world’s largest economies (including the U.S.) Income redistribution, protectionism, and isolationism may leak more and more into the collective conscious and if so, these are trends that have some definite investment implications.
