Cameron Reid CIO
Last night British voters elected to leave the European Union. This is an historic event for the U.K. and it will have meaningful, if uncertain consequences for their economy.
The initial response in capital markets has been volatile and dramatic. The pound has hit a three decade low, French and German stock markets are each down more than 6%, bond yields are falling meaningfully in the safe haven countries (U.S. Switzerland, Germany) and gold is up nearly 5%. Most of this is short-term trading as brokers and hedge funds re-balance their leveraged positions.
As big a deal as this is for the U.K., it's a very small event for Clients of WealthCo.
The immediate consequences will be quite modest and, longer-term, the companies that we have invested in have very little direct exposure to economic growth in both the U.K. and the rest of Europe. Growth will likely slow in both these regions and any prospect of central banks raising interest rates anywhere in the G7 has likely been pushed out even further in the future. It's worth highlighting that the U.K. accounts for 3% of US trade and only 2.5% of Canadian trade.
These events are also a reminder of the importance of WealthCo's mandate of "Authentic Diversification", meaningful allocation to assets outside the short term volatility of the public markets such as real estate, mortgages and alternative investments.
According to the E.U. Treaty, the U.K. now has 2 years to negotiate an exit. This will be a messy process and there will be market movements along the way. However, it's more likely than not that the E.U. gives the U.K. a reasonable path out. The U.K. is the second largest economy and is one of the top three export markets for nearly every country in Europe.
While the U.K. has left the E.U. it didn't leave Europe.
Attached is an economic summary piece from the economics team at BMO Nesbitt Burns for those of you who would like additional detail. Below, I have also provided a link to an article that briefly outlines the geo-political interests that will likely dominate the negotiating positions of the U.K. and the E.U.