By David Guttery
So much for the end of the world. Again. I’m beginning to wonder the pundits offered by the mass media are serious, or are they simply there for comedy relief. Collectively, they’ve predicted 94 of the last 2 global economic calamities. Lee Corso has a better record picking winners of college football games.
Over the next few weeks and months, the feedback loop between financial market reaction and the global economy will play an important role in how long-lasting the impact will be.
Great Britain joined the European Economic Community in 1973, before the “European Union” name was adopted and its regulatory powers expanded. Even at the time, it was a controversial decision. Some loyalists complained that Britain was giving up a measure of its sovereignty to continental Europe. Years later, when the euro was adopted, the U.K. refused to join the common currency, opting to stay with the pound instead.
Rob Lovelace, a Capital Group portfolio manager said, “The bitter campaigning around the referendum has exposed issues related to immigration and demographics that the political system will need to address. While no one ever likes to know that there are more problems than you realize, you can’t start solving the problems if you don’t know what they are. We know what the problems are now and those problems will continue to be a challenge for the U.K., both internally and externally. The key point to remember is, this referendum is the beginning of a process, not the end.”
Economically, the pound sterling and the euro are likely to remain among the weaker currencies and the U.S. dollar and Japanese yen among the stronger currencies. In European bond markets, the yield difference between the bonds of smaller southern European nations and those of German bunds could remain elevated.
There are some who are suggesting that the U.K. might experience a mild recession, two years from now, when the economic impact of departing from the EU is manifest. Then again, others suggest that the UK should be able to devalue its currency enough to remain in a competitive position.
Brian Wesbury, the chief economist with First Trust had the following thoughts on “BrExit” and its potential long term impact on the global economy.
Voters of the U.K. are just fed up. And why shouldn’t they be? Britain is a sovereign nation. Its people are supposed to be able to make political decisions for themselves through a democratic system. But now many decisions the British people consider important are made by unelected European bureaucrats. Transient parliamentary majorities are not supposed to be able to delegate decision-making authority to foreign capitals, just like they can’t install a dictator. The decision itself negates democracy.
And you don’t have to disagree with the EU on policy issues to take this position. International trade is generally freer because of the EU and that’s a good thing. But it’s not necessary to trade sovereignty for freer trade. Immigration and what welfare benefits immigrants can get, if any, are clearly sovereign decisions. That’s what Margaret Thatcher would have wanted, as opposed to the Europhile bureaucracy-believers, like John Major, who removed her from office without the voters ever having a say. That Major prefers the EU over the British people is really no surprise.
The bottom line is that investors should ignore scare stories about the implications of “BrExit”. Great Britain runs consistent trade deficits with the rest of Europe. Regardless of what foreign leaders say of the vote, the British voted to leave, and the rest of the EU is going to chase them to the ends of the earth. No way will they allow one of their biggest export markets to become more distant. They will beg the U.K. to sign a free trade deal. In addition, and this is actually great economic news, it would free the US and UK to sign a free trade deal that the EU is now holding up.
Any market volatility would be short-lived and any swing to the downside would be a buying opportunity. “BrExit” is not a reason to sell. In fact, freedom is a good thing.
When tomorrow is uncertain, it generally leads to volatility. This is normal, and clarity will come. Remain focused on the objectives that define your investment strategy.