July 25, 2016
Back on June 13th we cautioned investors about the uncertainties caused by the June Federal Reserve meeting, and the UK referendum on European Union membership. The news from the Federal Reserve was pleasantly dull, and more of the same is expected until September. By comparison, UK events have been the stuff of fiction. Few commentators predicted correctly the outcome of the vote, and even fewer would have suggested that, after a short period of volatility, equity markets would recover, and then power ahead. So has Brexit become another “Keep Calm and Carry On” moment? Here are some thoughts following a two week spell in England.
Most obvious of all, Brexit will be largely felt only by the Brits. Of course there is some impact on the rest of the EU, but there is no sign that other countries will follow suit. In fact, any country already using the Euro as its national currency effectively has its hands firmly tied – unlike the Brits who still see the Queen on their pounds and pence.
Within the UK, the division over the vote is real, fierce, and ongoing. “Remainers” tend to be younger, more educated, and more enamored with the idea of an open world – and these characteristics cut completely across political affiliations. “Leavers” tend to be more focused on issues of national control, especially immigration, and have a heightened emotional desire for “independence”. It seems that many in the media would rather stay in the EU, and that might be the reason for reports that there will be a second vote. That is not going to happen, as has been made clear by the new Prime Minster, Theresa May.
So Brexit will occur but, as in life, the nature of the leaving is as important as the leaving itself. Surprisingly there is no coherent understanding of what the UK will look like outside the EU. This vacuum must be filled quickly. Some of the problems that have to be addressed are almost intractable. For example, how will the UK square its desire to “control” immigration when about three million UK residents are citizens of other EU countries, and well over a million UK citizens live elsewhere in the EU?
Not surprisingly, Ms. May wants time to obtain some consensus on the UK’s Brexit terms before she triggers the two year timeframe for making it happen. Ms. May’s problem will likely be that other EU leaders will not be patient or accommodating.
While the politicians do their thing, the rest of the country have to move on with their lives. Already some firms are considering moving to other EU countries, investment decisions are being delayed, overseas holidays have become more expensive, and fears about the impact on the real estate market are making things tricky for buyers and sellers alike. It is at this individual level that the uncertainty over Brexit is hitting home.
So the simple message is that Brexit is for the Brits even though many do not want it – and this is a good time to use dollars to fund a long desired trip to witness pomp and history in the Old Country.