Thoughts on Brexit

On June 23rd voters in Great Britain will vote on a referendum that will determine whether or not Britain will remain a member of the European Union. This situation is widely referred to in the press as Brexit – British exit from the EU.

Should I stay or should I go

The potential for Britain leaving the EU has led to an increase in volatility in global equity markets. This in turn has put Central Bankers on high alert and significantly increased demand for European sovereign debt, some of which trades with negative yields. While Britain’s membership in the EU will not have a significant impact on your daily life, it may have an impact on your investments, so let’s dive into what a potential Brexit could mean for you.

Going out on a limb

I am not usually one to make predictions. Good investors know their limits and predicting the future is definitely beyond mine.  That said, I will go out on a limb and say that the British electorate will likely vote to stay in the European Union.

I say this because while everyone likes the idea of independence and self-determination, in reality, very few like actual change and the risk that comes with it. I’ll point to Scotland’s vote on leaving Great Britain and Quebec’s failed secession from Canada as examples of citizens taking great pride in their identity and demanding the option of sovereignty, but in the end sticking with the status quo.

The British situation is different, and in some ways the forces at work are the opposite of the examples above, but I still think the desire for stability will outweigh the need of the British people to express their independence or their dissatisfaction with European Union policies.

Possible Outcomes and Investment Impact

We can see from recent swings in the stock market, which have been moving in lockstep with poll results, that a Brexit would be considered bad news for the global economy. So, if the voters decide to stay, it is likely that equity markets will breathe a sigh of relief and increase in value as investors regain their appetite for risk.

On the other hand, we agree that Britain leaving the EU would result in broad disruption of the European economy. Trade would be interrupted and agreements would have to be renegotiated. Immigration and free movement between countries would be thwarted. This uncertainty could, in the short-term, result in a typical flight to safety – a stock market decline offset by a strong bond performance.

But in the long-term, there will be both winners and losers under these new circumstances. After all, the world is filled with billions of people who wake up every day, get dressed, drive their bike/moped/bus/car to work, and put in the effort so their children will have a better life. This has always been the case and will continue regardless of Britain’s membership in the EU. So while some countries and companies will be worse off from a Brexit, some will be better, and in aggregate, we should all be better off over time.

We do not make large country or currency bets, so the potential for a significant correction should be somewhat mitigated. In fact, our globally diversified portfolios contain a mix of assets that could benefit no matter the outcome. This, along with our focus on the long-term sustainability of portfolios over decades, not weeks, allows us to look at any potential disruption as a short-term bump in a very long-term road. 

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