For those who pay attention to current events, the heightened level of media attention the potential “Brexit” (a phrase coined as a combination of the words “Britain” and “Exit”) has not escaped notice. Is the Brexit worthy of attention? We believe so, yes, but perhaps markets are beginning to excessively obsess over the outcome. The UK market makes up about 4% of global capital markets. It’s important to realize that world players like China, Japan and the US have a far greater impact than the UK economy. That being said, let’s take a look at considerations surrounding the Brexit referendum of June 23rd, 2016.
Currency Affected by the UK
Even though Great Britain is not part of the Eurozone and, therefore, does not use the Euro as its currency, the Euro could certainly be affected. While the UK makes up a small portion of the global economy, the EU countries in aggregate would rank as the third largest global economy (if it were a single country). The potential currency movements and effect on portfolios and global competition is noteworthy.
The Unpredictable Nature of the Vote
The polls show this could be a very close vote, with younger voters tending to want to stay in the EU, and older voters leaning toward leaving. Due to this age profile, political strategists are seriously analyzing factors like the weather, the schedule of popular concerts and major school exams as conflicting factors that could affect the age profiles differently, who shows up to vote, and ultimately the outcome of the referendum.
Brexit’s Affect on Foreign and Domestic Markets
We believe an outcome of the UK staying in the EU would be less disruptive to markets in the short term and deals with the economic risk markets are worried about. Even with that outcome, a close race in the voting will likely do little to reduce the political risk going forward.
What does Brexit Mean for the UK?
There is little-known information about what the terms of a Brexit would be. If an exit is decided, there is a period of up to two years where the terms of the exit would be drawn. We believe speculating on outcomes without knowing the terms of the exit is dangerous to wealth preservation.
Aside from speculating in markets, do we think there is room to be proactive? Yes. Markets seem particularly hesitant and cautious at present but, keep in mind, these sentiments can change quite quickly. We are poised to respond to a potential market upset with a readiness to buy if markets become soft. We believe such discipline to rebalance back to portfolio targets is key to adding long term value to portfolios. As the referendum approaches, we continue to evaluate portfolio positions and risk levels as we navigate through this and other global events.
Published: June 22, 2016
Author: Bethany Muensterman, CFA
Phone: (812) 602-6307
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