Following Britain’s vote to leave the European Union (EU), the markets — currency and equity — are showing downside movement. In the immediate wake of this vote, we know two things:
- Global economic and political uncertainty has risen.
- Due to this uncertainty, most capital markets are swooning.
What we don’t know about the fallout from the Brexit vote can fill volumes. That being said, the following are bullet points for investors to consider as the investment world wrestles with the backlash from the Brexit vote.
- Is the Brexit action a disaster for the world’s economy? No. Once the capital market and political dust settles, global implications are likely to prove much less dramatic than has been recently outlined by opponents to Brexit.
- Just because the vote took place does not mean that Brexit will happen today, tomorrow or next week. It is generally thought that it will take at least a couple of years to put the proper ‘paperwork’ in place for Brexit to actually occur.
- It is, however, important to understand that this hasn’t happened before, so there isn’t history on which to draw conclusions. The longer-term political ramifications may be significant.
- It is important to understand the weight of this vote — since the 1970’s, the world has been marching, grindingly, towards more economic openness, towards economic globalization. Some could argue this is the first significant step away from that march.
- Will other countries choose to leave the EU? Will other countries consider leaving the European Central Bank (ECB)?
- The fundamental economic outcome of this vote is uncertain. Britain and Europe will not immediately fall into recession, but uncertainty is higher today than yesterday. When people are faced with uncertainty, one typical reaction is to ‘freeze’. People may be able to transact, but are unwilling to do so due to high levels of uncertainty. Consequently, economic transactions may not occur, which can lead to economic weakness.
- The immediate economic impact on the U.S. should be marginal. While Britain represents the fifth-largest economy in the world, our trade activity with Britain is not that big.
- The impact on Europe may be lower overall economic growth than may otherwise have been the case.
- The impact on Chinese economic growth may be real, as the European area represents their largest trading partner.
Where does all of this leave us? It’s early after the vote but here are some thoughts:
- The global stock markets were 5 to 10 percent cheaper on Friday, June 24 than the day before. Will earnings be lower over the next 12 months than would have been the case without Brexit? We don’t know, but we don’t believe this event in itself is enough to throw the world into recession.
- Without recession, earnings growth tends to be positive. When earnings have risen in the past, 71 percent of the time stock prices have risen as well. Look for opportunities to put cash to work, if you have it.
- Fixed-income markets (particularly high-quality bonds) should hold up well over the remainder of this year. Investors flee to quality during times such as this, and we will probably see more countries considering leaving the EU in the future. These events will raise uncertainty, which should keep bond prices strong — but yields low.
- Currency volatility raises risks on inter-country liquidity flows. This isn’t good, and typically leads to economic sluggishness. Expect overall volatility to continue for some period. Due to this, don’t spend all of your cash today or even over the next month. For those investors who are fully invested, consider rebalancing portfolios toward long-term targets — that is ‘buy low, sell high’, which is what rebalancing is all about.
Bill Greiner is chief investment strategist of Mariner Wealth Advisors.
This originally appeared on the Montage Investments Market Commentary blog.