Brexit Is Here
What you can expect
A perspective from E*TRADE Capital Management
The long awaited “Brexit” vote—the referendum on whether Britain should leave the European Union (E.U.)—has finally taken place. And the “yes” side has won: Britain will be the first nation to ever leave the E.U. Here’s our take on the potential implications for the markets and investment portfolios.
Britain is the 5th largest economy in the world. As a member of the European Union, Britain has been able to trade openly with other member countries and operate as one of the union’s financial services hubs. Several of Britain’s political parties have been calling for a vote on E.U. membership for some time. This particular referendum was initiated when Prime Minister David Cameron promised to hold a vote on E.U. membership if he won the 2015 general election, which he did.
Those who voted to leave the E.U. claim that Britain will be able to negotiate better trade deals and have stronger control over its borders. Those who voted to stay believe that leaving the E.U. will result in years of uncertainty and significant negative economic consequences.
The true economic impact of Brexit will depend on what type of exit settlement is reached by Britain and the E.U. In particular, will Britain retain access to the E.U. for trade while remaining the center of Europe’s financial services industry? Answers to questions like these (and the impact to economic growth in the U.K. and the remaining countries in the E.U.) will not be found anytime soon, as it will take several years for Britain to actually leave. One deep-seated fear is that the U.K.’s departure will cause other countries to follow suit, resulting in economic chaos and pronounced uncertainty.
As is the case with any unprecedented geopolitical event, market reaction is difficult to predict. However, for the immediate future:
While many diversified portfolios will have some exposure to areas of the market potentially negatively impacted by Brexit, they should also have allocations to assets that stand to benefit. Regardless, depending on the specific portfolio, there may be volatility in certain asset classes.
As always, maintaining a long-term point of view is critical to weathering current market volatility. This can be made easier by owning a broadly diversified portfolio aligned with one’s goals and risk tolerance. Avoid the immediate emotional temptation to attempt to time the market. It’s quite possible, in fact, that markets may rebound over the coming days. Even more importantly, it’s far too early to make sense of the longer-term implications of this historic event, which is key to understanding how financial markets will be impacted over time.