Brexit: Aftermath of UK ReferendumSubmitted by Stonehaven Financial Group Inc. on June 28th, 2016
Overnight the UK population voted to leave the European Union which has surprised global markets as the Remain vote was expected to win in a tight race. Equity markets are declining in every part of the world and have been hit especially hard in Europe while bond yields are moving lower and the USD is gaining against all other currencies.
So what happens next and why are markets declining??
- Mr. Cameron has already spoken to the Queen and advised her of his plans to resign. This will probably come in October at the Conservative Party National Convention where a new Leader will be selected.
- When does the UK invoke Article 50 of the EU which stipulates their intention to leave the Union? There is much uncertainty around this as the “Leave” leaders are now asking Mr. Cameron not to invoke yet as they claim there is no rush while Mr. Cameron has stated that the vote of the British public has to be honoured immediately. Interesting debate ahead. Once article 50 is invoked it will take approximately 2 years for Britain to completely leave the Union. (more on this in the Scotia Economics articles sent this morning)
- Markets are declining on political and economic uncertainty both across Europe due to the vote and in other parts of the world due to the implications of a strong US Dollar.
- Political uncertainty. There is no doubt that the Euroskeptic movements across the continent will take comfort from the UK vote and we will see many protests and debates in several countries as they look to potentially exit the EU. Spain votes in its National Elections on Sunday and this will be the first test for the EU. Nicola Sturgeon, Scotland’s First Minister has already stated a referendum on independence is back on the agenda as Scotland wants to remain part of the EU (this was evidenced by the overwhelming “Remain” majority in Scotland).
- Economic uncertainty. With the UK set to invoke article 50 how does this affect trade in Europe and with the rest of the world? The uncertainty will have a damaging effect on demand in many European Nations as both personal and corporate spending slows and savings rates rise. To put it simply if you don’t know if you have a job tomorrow then you do not spend today. There is now a heightened risk of recession ahead in Europe.
What do we do next?
Our first comment here is “don’t panic!” By acting in haste we are more than likely to sell at bottoms. We would rather take a more rational and measured approach to managing portfolios. Although this is a very special event, typically in events such as this we see an overreaction as Hedge Funds and fast money runs for the exits trying to make a quick dollar.
You also have the effect of hedging portfolios which further extends the decline. This action tends to slow after a few days and the market rebounds. By taking our time and being able to assess markets and economic effects properly this allows us to re‐position portfolios and protect our assets in a more measured fashion. Although the declines are very large for one day we are only back to the levels we were at a week ago in many markets so again we do not see the need to panic.
As for the Canadian equity market we do not see as much of a negative reaction as other global markets as the domestic equity market is more defensive in nature with many dividend paying names and will also be supported by the gold trade. While crude oil is also declining this morning, we have been noting that supply/demand fundamentals have been moving in a supportive direction.
The market impact of UK’s decision exit the EU is unlikely to be completely discounted in today’s trading session. Ultimately, we do see the sell‐off resulting in attractive opportunities to deploy cash in high‐quality, dividend paying companies.
We continue to recommend focusing on long‐term investing discipline with a focus on high quality investments within a balanced portfolio that will serve us all well in these volatile times.
Global Portfolio Advisory Group
Scotia Wealth Management