Undoubtedly, the U.K. vote to leave the European Union has a negative impact on business and investor confidence. Not only does it increase fears of the bloc’s disintegration – emboldening anti-EU parties like Spain’s Podemos and Italy’s Five Star Movement – but, more importantly, it creates an upsurge in populist groups promoting nationalism and protectionism. That’s a clear negative for risk markets.
However, the actual outcome will not be as binary as markets are predicting. Once the dust settles, Brexit will very likely prove yet another post-crisis macro fear with limited fallout. Why?
First, markets have already been pricing in damage to investor sentiment. Safe havens such as the Japanese yen and gold are soaring and tracking referendum odds very closely. With the results now in, a more certain path will become visible, and markets will re-price.
Second, even with the Brexit vote, the U.K. will likely be a member of the EU for a few more years at least (even “Leave” leaders have cited 2020 as a likely exit). Referendums are merely a recommendationto politicians (who often drag out the process to determine particulars of the actionable result).
Thirdly, the Brexit surely has forced central bankers into action (which will essentially further underwrite higher asset prices). The ECB would be out with new tricks. But also countries from Norway (with strong trade linkages to the U.K.) to Switzerland (still a relative safe haven) would be forced to increase stimulus and intervene in domestic currency markets.
Investment implications
In general, fear is very high, and Brexit is dominating headlines. But post-referendum certainty alone will likely buoy global risk markets. The British pound has already been beaten up, and U.K. equities are dominated by banks and commodities, which are impacted only modestly by a changed relationship with the EU (HSBC, for example, earns two thirds of its profit from Asia). In short, Brexit will cause dislocation but also opportunity for intrepid investors.
Courtesy Fundata Canada Inc. © 2016. Tyler Mordy, CFA, is President and Co-CIO of Forstrong Global Asset Management Inc. Securities mentioned are not guaranteed and carry risk of loss. This article is not intended as personalized investment advice.
