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Brexit – Storm in a Tea Cup Thumbnail

Brexit – Storm in a Tea Cup

What is the Brexit?

Unless you’ve been glued to financial news lately, this may be the first you’re hearing of the Brexit, or the United Kingdom leaving the European Union. This “storm” has been brewing for some time now.

(photo: Konstantin Tilberg,  CC 2.0)

U.K. citizens have debated the value of staying in the E.U. given several concerns, including:

  • E.U. spending
  • E.U. regulations and bureaucracy
  • Immigration concerns
  • Desire to retain British identity/independence (for example, the U.K. has always used British Pounds, not the Euro)

 Last night British voters made their wishes known in a popular referendum—a 51.9% majority voted to leave the E.U., and voter turnout was extremely high – U.K. citizens wanted their voices heard!  

Today, the E.U. is like a mall that lost one of its big corner stores – Macy’s just gave notice that it is moving out. Other occupants are naturally nervous about what this means for them.  Here in the U.S., we expect this to add to what we thought would already be a year with heightened volatility. 

 What happens now?

This will be a complex transition with a lot of uncertainty along the way. It will take some time for new legislation and trade agreements to be created and implemented.  In addition there is another significant change for the U.K. as their Prime Minister resigned but will stay on to October until his replacement takes office. Per EU agreements, a full exit from the E.U. will take at least two years.

 Markets don’t like uncertainty—meaning this will create disruption in global markets in the short-run.

 European markets are negative on this news with the PIGS countries taking the brunt of the hit (Portugal, Italy, Greece and Spain).  These countries need a sound European Union to help their struggling economies.  The fear of a domino effect is discounting their markets – Germany is naturally concerned they may be forced to handle more of the burden to hold the E.U. intact. 

 This may create a prolonged period of low corporate investment and higher trading costs for the E.U., resulting in a negative impact on member countries’ GDP (especially the more economically vulnerable members).  Therefore, markets are pricing in this adjustment for them.  Interestingly though, many of the large companies in the FTSE 100 Index are global rather than U.K. businesses – 80% of the Index’s revenues come from overseas!  This will help to insulate the E.U. from a domestic downturn and even create some opportunities with a falling British Pound.

How does this affect my investments?

As we have alluded to earlier, the Brexit storm has been brewing for some time—and it’s not the only major event likely to roil markets in 2016. The good news is, you have an umbrella for this storm!

Going into the Brexit vote, no one knew which way it was going to go. The same could be said of our U.S. election, or the Fed’s pending moves on monetary policy. No one knows for sure how these events will turn out, but our investment strategy does not depend on us guessing correctly one way or the other.

It’s like going for a four-mile walk with your family when you’re not sure if it’s going to start raining or not. If it starts pouring at the two-mile point, of course it would be silly to say, “Wait, I’ll go back and get an umbrella so you don’t get wet.” Even if you’re not sure if you will need it or not, you must be prepared for any potential storm on the horizon.

So at Halpern Financial, we carry an umbrella for our clients. We have prepared for some time now with an emphasis on larger, cash-healthy companies by favoring value based investments in the U.S., reducing exposure to developed foreign markets, limiting risks with emerging economies, expanding the role of alternatives and uncovering a wide variety of fixed income solutions.  These moves are designed to shield us from the declines we will see on the news associated with global markets.  They also position us in a way to do well as others drift to safer options we already hold.

What should I do, if anything?

We are always asked what can be done in light of historic news like this (this morning alone, two journalists have reached out to us for comment!).  In this case, and the fact that it is a summer filled with nothing but election news in the U.S., rest assured that your portfolio is already appropriately diversified and prepared for volatility…..so consider a trip overseas to the U.K.!  After all, your dollar will go much farther now with declines in the British Pound and you can happily tune out the noise and posturing surrounding our own elections!   


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