The EU (European Union) was established following the end of WW II in order to offer financial and structural stability for European countries. Since its establishment, the EU has grown to a membership of 28 countries, abiding by various rules and policies set forth by the EU Council.
One of the responsibilities of member EU countries is to accept and honor immigrants and citizens from other EU countries as part of the human rights initiatives recognized by the EU. Immigration has been a topic of contention among various EU countries for sometime. This was a decisive factor for Britain leaving the EU since its economy and cities have been inundated by foreign-born immigrants seeking jobs and a better quality of life.
The markets have reacted negatively to the announcement, pushing down stocks, the British pound, and bond yields as investors seek the perceived stability of bonds as markets worldwide acclimate.
Since Britain has been part of the EU since 1973, it is expected that the unraveling of British ties from the EU could take years. Contracts, employees, and laws will all have to be revised, reshuffled, and rewritten in order to accommodate the divorce between the two.
Now that the British have decided on leaving the EU, many believe that another referendum could possibly be presented in France and other EU countries. The concern of a domino affect is very realistic, as several other EU members are experiencing similar frustrations as Britain.
Expected effects in the U.S. include:
Prolonged low interest rates
More assets flowing into the U.S. from abroad
U.S. companies altering European contracts
Stronger U.S. dollar versus the British pound and euro
Todays market reaction to Britain voting to leave the EU is very nerve racking. Today reminds me of one of my favorite investing quotes by William Bernstein; “In the short term markets are a voting machine, in the long term they are a weighing machine.” This means that healthy companies will always win despite short term news cycles. Professor Shiller of Yale also reminds us that the value of a stock is the present value of future cash flows (dividends). Market volatility is just short term noise based on news cycles, not actual company performance. Todays emotional market reaction causes short term volatility, but not long term losses, especially the way invest focus on building portfolios using long term healthy asset classes.
Casey T. Smith
Also see Vanguard’s response to the British exit