Guest Post by the Alphastart Capital Management Investment Team
Clients have wondered what Britain’s exit from the EU means for their investment portfolio.
Here is our view on how this will affect our investment strategies.
Yesterday, the United Kingdom (“UK”) held an historic vote. The issue was whether to exit the European Union (“EU”)-known as “Brexit”-or to remain. The public debate was heated. Both sides of the issue predicted a gloomy future for the British people, if they chose poorly. Up until the voting booths opened, polling had the decision at a statistical tie, but Brexit won with nearly 52% of voters in favor and only 48% voting to remain. Now that voters have weighed in, the world is left wondering what comes next.
Let’s start by establishing that the vote did not officially withdraw the UK from the EU. The first step in withdrawing is to file a notice under Article 50 of the Treaty on European Union. That notification starts the clock on a two-year negotiation deadline. During that time, representatives from the EU and the UK will meet to establish a new foundation for their relationship, including: trade, immigration, and other issues. David Cameron, current Prime Minister of the UK, announced today that he will resign by the end of October and that his successor will be the one to submit the Article 50 notification.
As simple as that withdrawal process sounds, it’s likely to get a bit messy. By voting to leave the EU, the UK is abandoning a decades old partnership and doing so at a time when that partnership is under extraordinary financial and political strain. The EU is unlikely to be forgiving or accommodating during negotiations. In fact, it may attempt to drive a hard bargain in the attempt to dissuade other members from considering their own escapes from the EU.
Today, the falling value of the British pound and the volatile stock markets are the result of speculative trading. This is not an unexpected response. The next couple of weeks will likely see continued volatility. Investors hate uncertainty and surprises, and we are likely to see a fair amount of both in the coming days. Whenever another politician talks about Brexit and proposes a possible course of action, the markets will react. At least until, investors are numb to all the idle talk and settle in to wait for the negotiations to start.
In the intermediate term, expect the UK and the EU to begin moving pieces into place for the negotiations. Some of this will be political theater as various politicians talk tough, but each side will begin taking actions to gain leverage. As examples, the UK could start repealing some EU-mandated regulations and the EU may begin speaking with Scotland about its future in the EU. This will be the ugliest part of the Brexit process and it may last for as long as two years.
Eventually, this divorce will conclude and then the UK and the EU must live as neighbors. They depend on each other for trade. The UK is a net importer of EU goods, so the EU should be very interested in maintaining good trade relations. Meanwhile, the UK does 44% of its trade with the EU and needs to keep that market open. As long as the negotiators and politicians stay focused on this long-term future, the damage to the global economy should be contained.
Our investment position will not change immediately. However, we are monitoring the global equity market price levels and will potentially reduce some of our foreign equity exposure in the near term. We will be patient with any changes because we believe the global equity markets will be somewhat unpredictable and excessively volatile in both directions.
– AlphaStar Capital Management Investment Team