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Brexit: Initial Impressions

June 27, 2016

Enterprise Trust Company

As you know well by now, the UK electorate voted to leave the EU last week. The capital markets reaction on Friday was predictable. Japan and developed European equity markets sold off between 4-7%, depending on the market. Oddly, Japan sold off the most and the UK was one of the better performers, down 3.85%. Emerging market stocks faired better, down a little more than 1%. In the US, stocks were down 3.3% on Friday but, due to strong performance Monday, Tuesday and Thursday, only 1.5% for the week. Treasury yields fell to near record levels. Currencies were volatile, with the £ down more than 8%.

While the details of the exit will be negotiated over at least the next two years, between the UK and EU, some immediate implications are clear. Imports, capital and labor in the UK will become more expensive. Trade with the UK will be negatively impacted. Even if no additional duties, tariffs or trade barriers are ultimately imposed as part of the ongoing negotiations. Political harmony in Europe is threatened. For that matter, political harmony in the UK is threatened, as Scotland considers either blocking the deal or seceding from Great Britain. In Northern Ireland, Sinn Fein has again raised the specter of independence from Britain and unification with independent Ireland. Finally, both the UK and Europe are at risk of falling into recession.

That being said, the global economy and capital markets will “weather the storm.” In the bigger scheme of things, the voters’ decision, while negative, has changed very little about the economy. UK and European politicians and negotiators will strive to reach a deal which impacts all parties as little as possible. That being said, European leaders will not want to reward the UK for this vote, so expect negotiations to be contentious.

After the dust settles, and it is possible to form a fuller and firmer conclusion regarding this situation, we will provide a more complete report on this decision and its impact. In the meantime, while the markets are likely to be volatile this week, investors may want to consider if the current environment represents a buying opportunity. Most equity markets are down again this morning between 1-2%. Our sense is that the sell-off may be overdone (with the exception of the £ and UK equities). The largest negative impact of his decision will probably fall on UK citizens. It appears the voters have “cut off their nose to spite their face.”

Disclosures: This piece discusses general market activity, industry or sector trends, or other broad-based economic, market , or political conditions and should not be construed as research or investment advice. The opinions expressed are those of the author and do not necessarily represent the opinions of Enterprise Bank & Trust. Past performance is no guarantee of future performance. No diversification strategy can guarantee against loss.


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