Implications for “Brexit”

Investors received surprising news this morning, as the United Kingdom (U.K.) voted to leave the European Union (EU).  While markets will no doubt experience increased volatility in the coming weeks, longer-term, we believe the negative impact of “Brexit” will be largely contained to Great Britain and Europe.

Trade accounts for about 40% of the U.K.’s gross domestic product (GDP), with most of those exports and imports tied to EU partners.  As a result of the recent vote, Britain is likely to see higher trade tariffs from the EU and more trade staying within continental Europe’s borders.  Both of these shifts could weigh significantly on Britain’s economic growth in the mid-term and would likely weigh on EU growth as well.  One positive is that the U.K. never adopted the Euro, choosing instead to maintain the British Pound as its currency.  This is should make an exit from the EU smoother and slightly less costly than if they had converted to the Euro, and suggests it could be less detrimental than if Greece had left.

While the U.K. is likely to experience the largest negative impact by leaving the EU, continental Europe is also at risk given its relatively fragile economic expansion following the Financial Crisis of 2008-2009.  From 2010 through 2015, EU GDP has grown at an average rate of just 1.2% compared to U.K. GDP growth of 2.0%.  Thus any major shock, such as one of its strongest members leaving the Block, could derail those modest growth levels.

Turning to the U.S., Europe is one of our larger trade partners with about 16% of total U.S. exports going to the Block last year.  This is not an insignificant number, and will likely weigh on U.S. GDP growth in the near-term.  However, the U.S. consumer remains the largest driver of our economy, accounting for about two-thirds of GDP growth.  Following the Financial Crisis of 2008-2009, the U.S. consumer has gotten healthier, supported by an expanding housing market, strong jobs growth, and deleveraging.  A resilient consumer and relatively better economic growth compared to the rest of the world should position us to better weather the recent developments in Europe.

To be sure, today’s news surprised investors and markets alike.  Although the near-term economic impact will likely be limited to the U.K. and Europe, the vote has broader implications for the future of the European Union.  While we can’t predict the longer-term repercussions of today’s historical vote, we can assure you of the benefits of staying invested in a diversified portfolio over the long-term.  Markets will experience sharp corrections, as well as strong rallies, yet clients who remain invested across asset classes throughout the market cycle have a better chance of reaching their financial goals.  With this perspective in mind, market declines like the one we’re seeing today simply represent an excellent opportunity to rebalance your portfolio at more attractive valuations levels.

 

Thank you,

The Parsec Team

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