In rather shocking display, the U.K. voted to leave the European Union (EU) by a 52% to 48% margin. The global market place has been fairly nervous about a “Brexit,” though we feel it is best for investors to keep things in context. While the stock markets today are reacting negatively and we’re likely to see continued short-term volatility, the situation is evolving and will need to be closely monitored going forward.
The upcoming formal legal process of withdrawing from the EU – an approximate two year negotiation process – should provide a clearer impact of the “yes” referendum vote. While we ride out the near-term volatility, our outlook regarding global growth this year remains modest, though the Brexit vote has created uncertainty about U.K. economic growth, and we believe the decision to leave the EU could push the U.K. into recession in the short term. It also could open the door to other countries questioning their membership in the EU and potentially do harm to Europe’s economy overall. At Ivy, we’ve done our due diligence studying the potential impact of a Brexit. Our key takeaways include:
Brexit outcome – The vote to leave the EU was clearly a surprise to investors. Markets had rallied the past few days in anticipation of a “stay” vote. Markets have fled to safety as most investors were leaning the wrong way.
Brexit – a difficult process. We believe the U.K.’s departure from the EU will be a drawn out and difficult process. The vote highlights the global trend towards rising nationalism, and sets the stage for the U.K. to set its own immigration and trade policies. The U.K. will have to set new trade deals with the EU and the rest of world, resulting in potential losses in exports and investment flows.
More to leave? Vote to leave sets the stage for the possibility of additional departures from EU. There is a growing risk of fragmentation across the EU. We are keeping a close eye on Scotland and Spain.
Central bank policy – vote likely takes future U.S. Federal Reserve rate hikes off the table over the short term. We believe the Bank of England will provide necessary liquidity to halt funding stresses. The volatility and decline of the British pound will likely result in further quantitative easing. We believe a weaker euro is likely overtime.
GDP growth outlook – U.S. market may retain its relative appeal, with domestically-focused stocks likely enjoying support relative to multinationals. We expect a drag in Europe GDP growth stemming from risk-off environment and delayed CAPEX spending.
We encourage investors to not overreact to current situation. We believe the markets have proved amazingly resilient over the past decade despite significant bouts of volatility and ongoing macroeconomic and geopolitical headwinds.
The opinions expressed are those of Ivy Investment Management Co. and are current through June 24, 2016. These views are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed.
This information is not intended as investment advice or a recommendation to purchase, sell or hold any specific securities, or to engage in any investment strategy.