Brexit commentary

June 24, 2016

Brexit

This morning we awoke to the news that Britain voted to depart the European Union.  This is an important change that will alter economies worldwide and for which there is very little precedent (Greenland departed in 1982).

Below are a few key points:

  • The investment markets are currently falling as a reaction to the news, while investors continue to determine the long-term consequences.
  • We anticipate the British pound to fall in value against the US dollar and Japanese yen, as it is currently doing.
  • Nothing immediate will happen to businesses and individuals as a result of the vote.
  • Negotiations will take place to lay out the details of Britain's exit; it's likely that Britain will invoke article 50 of the Lisbon Treaty, which will give Britain two years to agree to terms of the departure.
  • During departure negotiations, Britain must choose one of two paths, and neither is particularly attractive:
    • Become a member of the European Economic Area, and then contribute to the EU's budget and allow for the free movement of people across borders.
    • Opt out entirely, then trade with EU member nations under the rules of the World Trade Organization (this is how America and China trade with EU nations).  According to many economists, this second option is more unattractive from an economic standpoint.
  • A British pound that declines in value relative to other currencies has several consequences, including:
  • It will be more difficult for other countries to sell goods in Britain as they become relatively more expensive.
  • British ex-pats will find their cost of living rise substantially (there are many living in Western Europe and Asia).
  • US companies doing business with Britain will see earnings decline as they convert their revenue (received as pounds) back to US dollars.

The team at Syverson Strege and Company & Sherpa will continue to watch the news coming from the UK and look for signals that may alter our investment course.  As of today, we find that our strategies are well-diversified to withstand economic and political shocks such as this.

If you have any questions, please give us a call or an email.  We are here to help guide you through rocky economic terrain, and that's exactly what Brexit represents.

- Lance Gunkel, CFP®, CFA