What the U.K. Vote Means

Clearly a lot of volatility out there surrounding the U.K. voting to leave the European Union. Here’s a breakdown of what it all means by answering 5 questions. 

What happened?

The U.K. voted to leave the European Union and David Cameron has stepped down as Prime Minister as a result.

Why did they vote to leave?

Three reasons:

  1. Immigration: According to Bloomberg, roughly 500 people every day enter the U.K. and become eligible for employment and subsidies. The populist movement amongst many Brits wants this to come to an end.
  2. Cost: Britain can stop sending £350 million, equivalent to half of their entire school budget, to Brussels every week. This money could be spent elsewhere.
  3. Control: Leaving will return control over employment law, healthcare, and safety/security. They could renegotiate trade agreements and have a bigger voice in international affairs.

What is the timeline?

Most likely, this process will take at least two years. No country has ever left the EU before so they need to figure out how to do it.

Should I be worried?

No. I am not worried and do not expect this to cause any real problems for three reasons:

  1. There is no way that the UK separating from the EU can drive the world’s largest economy into a recession. This will have a very limited impact on the U.S.
  2. Several countries in Europe are already not members of the EU and are doing fine (Switzerland for example). We suspect that this outcome may actually be better for the U.K.’s economy because the money they were spending to be in the EU can be put elsewhere. Also expect the UK to sign new trade agreements in the coming years.
  3. The volatility has to do with trades unwinding and little to do with deteriorating fundamentals. Traders were betting on the direction of the vote and now they have to cover positions. Most of this will be done in the currency markets but since financial markets are interrelated these days, stocks will see some volatility as well.

A lot of the fear talk about the UK leaving is nothing more than self-interests playing out. For example, Jamie Dimon (CEO of JP Morgan) said it would be a bad outcome because he likely does not want to have to spend money to move an office from the UK to Europe. President Obama said it would be bad because politicians probably do not want to have to  spend time and money drafting new trade agreements. Simply put, be very careful what you read because many of the big names saying this is disastrous are nothing more than self-interested.

In fact, I am actually very excited to see such a great opportunity to go buy stocks and ETFs that may sell off. This is when money is made in markets. 

What does this volatility mean for investors?

Keep in mind that world equity markets fell over 20% in a matter of six weeks to start 2016, but then they (1) recovered, and (2) never drove the world economy into a recession. This is just another example of how emotions can take over for a brief amount of time but are never strong enough to derail large economies.

Read more on Brexit here: https://mikeonmarkets.com/2016/06/24/the-brexit-vote/  

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