Brexit Initial Overview

Last week, in what came as a surprise to many, United Kingdom voters elected to leave the European Union.  Global market reaction has been swift with the British pound sterling dropping and the dollar and yen strengthening, global equities falling and global bond yields moving lower.  Although Friday’s negative market reaction has been significant, we think it will be short-lived.

We believe the greatest negative economic impact will be concentrated in the U.K. with a drop in business and consumer confidence and a decline in business spending.  Europe’s growth could weaken by ½-1% this year but we still expect modest GDP growth, not a recession.  It seems we are seeing a long-term weakening of the pound sterling and a short‐term weakening of the euro.  Equity markets should re‐price quickly and then begin to stabilize, and bond yields will remain lower for longer. 

The Brexit vote represents a political crisis, not a financial crisis.  With the continued political uncertainty in the U.K., Prime Minister Cameron has announced that he will step down as leader of the Conservative party.  The separation vote starts a 2-year negotiation process and there is risk of contagion with other countries wanting to exit as well.  For the remainder of 2016 and into 2017, we expect elevated market volatility given the uncertainty created by the potential for a second referendum on Scottish independence and upcoming elections in the U.S. and Europe.

Economically, there shouldn’t be much spillover here.  U.S. exports to the U.K. represent less than 1% of U.S. GDP.  It is likely that earnings of U.S. multinationals with business in the U.K. and Europe will be negatively impacted, but we don’t expect a global crisis.  Central banks will most likely continue providing easy monetary policy to try to support modest growth.  Importantly, reforms made after the Great Recession have left the U.S. with a strong and stable banking system.

Periods of extreme market reaction to macroeconomic events have historically been short‐lived and we anticipate the same with Brexit.  The market instability can be unsettling, but we remain focused on long‐term objectives and will be looking to capitalize on any opportunities this latest crisis may present.

Thank you for your trust and confidence in Glenview Trust and please don’t hesitate to contact us to discuss further.