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Britain Exits EU and The World Is Not Ending

BrexitBritain shocked the world this week when its people decided, on a vote of 52% to 48%, to leave the European Union. The uncertainty of how this complex divorce will play out over the coming decade sent global markets reeling. London’s Financial Times Stock Exchange 100 lost 4.4% of its value in one day, and the British pound sterling is getting crushed (down 14% against the yen and 10% against the dollar).

Britain has two years to negotiate its exit from the EU so we can expect the markets to remain volatile for some time. Why all the fuss?

The thinking is that British companies will lose access to the European market for duty-free trade and financial services. Some think that with Britain no longer part of the European Union, London will be unable to function as Europe’s financial center, as it has done since companies have long seen Britain as the gateway to free trade with the 28 nations in the EU. Eventually, Britain could lose American investment and manufacturing jobs that would move across the channel to mainland Europe.

It is important to note that the Brexit vote is not legally binding on the government. Since British Prime Minister David Cameron has resigned his post and called for a new election, it’s possible that the new government might decide to delay withdrawing from the EU. Or Parliament could instruct the new prime minister not to notify the EU that Britain is withdrawing until the government has had a chance to study further the implications. There could even be a second referendum to undo the first.

Given all these uncertainties, what is my advice to clients? It’s quite simple: do nothing.

The current market disruptions represent an emotional roller coaster, a short-term panic reaction to what is likely to be a very long-term, drawn out, ultimately graceful accommodation between the UK and Europe. British companies are certainly not 4% less valuable today than yesterday, and the pound sterling is not suddenly a second-rate currency. People who sell will realize they were suckered once again by panic masquerading as an assessment of real damage to the companies they’ve invested in.

The good news is that we are long-term investors and only a minority of any of our portfolios are in equities. While the Brexit may not be good in the short run for Britain’s currency and global equity markets, it is a positive for other countries and markets. Gold is up, bonds are way up, and managed futures are having a stellar day. Our strategy of global diversification has worked, again. If equity markets decline sufficiently, we will rebalance and buy the dips.

However much short-term disruption there may be, my hunch is the Brexit will become just another blip on the long term charts.

 

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