Britain’s June 23 vote to leave the EU has unleashed fearful headlines galore—and many investors seem confused. The research team at Fisher Investments has analyzed Brexit and its likely impact on markets for more than a year. For stocks, the big takeaway: Far less has changed than many pundits claim, and far less is known about what is to come than most forecasts and analyses admit. Presently, there is no evidence Brexit will be disastrous—or even bad—for markets.
1. What is Brexit?
The EU is a political and economic bloc consisting of 28 nations permitting largely passport-free travel as well as tariff- and administrative-barrier free goods trade. The UK joined predecessor organizations in 1973, but it has long had a standoffish approach toward the EU. Many Brits dislike the EU’s supranational government with its own courts, powers to override some national laws and vast bureaucracy. There has long been a push in the UK to leave the EU.
Wooing conservative and right-wing voters in 2015’s general election, Prime Minister David Cameron promised to renegotiate the UK’s terms of EU membership and then hold a vote on whether to remain in the EU under these new terms or leave. When Cameron won, the referendum was a matter of time. In February, Cameron completed negotiations on revised membership terms and scheduled the vote for June.
2. What happened last week?
The campaign was vitriolic. Many opponents argued a Leave win meant a UK recession or worse. Supporters claimed it would free the economy and country. Both are overstated.
When the votes were counted, Leave won by a 51.9% to 48.1% margin, with turnout a lower-than-expected 71%. A day later, Cameron—a staunch “Remain” supporter—announced he would leave office by October.
3. What now?
No one—and we mean no one—knows exactly what the economic impact will be. Immediately, there was none: The UK is in the EU until an exit is arranged, unlikely anytime soon. Under the Lisbon Treaty’s Article 50, member nations have two years to negotiate exit terms after formally submitting to leave. But today, Article 50 hasn’t been invoked—it likely won’t be until after a new UK government takes office. Even then, it may not be invoked for years.
Brexit’s economic impact will be mostly determined by the post-Brexit trade relationship between the EU and UK, as well as countries the EU has trade deals with. This is key. Britain will have to build a trade negotiation staff and form trade agreements with places like the EU, Korea, Switzerland and more. If new deals approximate the UK’s position in the EU, Brexit likely has little to no economic impact. If tariffs and trade barriers rise dramatically, then it could be negative. There is also a huge gulf between those two polar opposites containing many possibilities. In short: Contrary to pundit’s assertions, Brexit’s fundamental impact is TBD—unknowable.
4. Will other EU nations follow Britain's lead?
Again, unknowable today. Since the vote, chatter about other countries following Britain’s lead abounds (an Italeave or a Czechout, perhaps?). This talk is mere speculation lacking supporting evidence. Moreover, after an inconclusive December vote, Spain voted June 25—two days after Brexit—and the center-right (pro-EU) saw its support rise. The result was still indecisive, but euroskeptics’ support didn’t surge—their popular vote total fell.
5. Must the UK Brexit now that the vote is in?
No. The referendum is non-binding, so Parliament can conceivably ignore it. Also, there could be new elections before an exit actually occurs, or a new referendum called. There are many possibilities. Leaving seems most likely, but that isn’t assured.
6. What about investments?
Volatility ensued in the vote’s immediate aftermath, but after four trading sessions, global stocks are down only –1.5% in Canadian dollars and –3.4% in US dollars.i To us, this underscores Brexit’s modest impact. Brexit lacks the power—or even the negativity (question three)—to sufficiently harm the global economy for long. Many unknowns tied to the vote won’t become clear for years, too long to materially impact stocks.
i Source: FactSet, as of 6/29/2016. MSCI World Index return with net dividends, 6/23/2016 – 6/29/2016.