U.K. Facing a Brexit Hangover – and Markets Aren’t Happy

Be careful what you wish for – You just might get it.

Today the United Kingdom is facing one massive hangover.  After months of discourse over the grand consequences of an exit from the European Union, the Brexit referendum passed by a rather slim majority (52-48), or by roughly 1.3 million votes out of a country of 46 million eligible voters.  With a 70% turnout overall, you have an extremely divided country.  Some regions voted 70-30 in favor of Remain, and vice versa.

The voting pattern was extremely distinct along demographic and geographic lines.  Scotland voted overwhelmingly to Remain, as did London – both areas where bad weather dampened turnout.  Northern Ireland voted to Remain, albeit more tepidly.  Wales and the rest of England were solid Leave.  The Remain camp veered young and wealthy, and the Leave camp older and poor.

This voting pattern reflects the two core trends in the U.K.: wealth inequality and immigration.  Both have created anger and frustration among Leave voters.  It is the same two issues that have fueled Trump’s campaign.  Interestingly, during the last major shift in U.S. politics – Reagan’s rise to the Presidency in the 1980s – the U.K. endured a similar upheaval with the rise of Thatcherism and the New Right.  After all these years, America and England are in lockstep.

An actual Brexit is a disaster. It will provide no economic gains to the UK and likely increase the wealth gap even further.  It might stem unwanted immigration, but the ensuing economic recession will destroy far more jobs than what is reclaimed. In the meantime, the Scottish independence movement is expected to be revisited and the consequences of a weakening European Union, containing our strongest political and economic allies, will be significant.

As for us, the actual impact on the U.S. economy is likely to be nominal.  It will take at least two years for the terms of a Brexit to be determined, and it is to be noted that yesterday’s vote is not binding, but instead a recommendation.  While there will be change, we don’t know what happens next in the political process.

What we do know is that there will be volatility – the bane of markets.  The pound is swinging wildly today (hitting historic lows) and markets are selling off because of fear.  We have seen this before – some event triggers widespread volatility and markets decline – followed by months of swinging markets until rational heads prevail.

We have positioned the portfolios to buffer such moves, and have a large cash position to take advantage of buying opportunities. Our exposure to the U.K. is negligible, but the impact outside of the U.K is yet unknown.  With Europe still recovering from a recession, this will further challenge that region while continuing to place a premium on U.S.-based assets.  In short, change is scary, but there are always opportunities for the long term.

And now we have a lovely start to the summer of 2016.

Cheers,

David