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Klingman Insights
June 24th, 2016
In a close ballot, Britain voted to leave the European Union. So what does it mean? As various published studies have shown, the departure will likely be negative for the UK economy and increases the chance of a recession. We would agree, and thus expect today's vote to be very disruptive to financial markets in the short-term. Britain never adopted the Euro as its currency, and there will likely be a significant fall in value of the British Pound. However, we do not think it necessarily spells the end of the Eurozone, nor the world, and, depending how this plays out, we believe it may present attractive opportunities in global asset prices.
The overall impact of the Brexit is hard to quantify as there are many economic and political uncertainties that will remain. There are going to be unanswered questions around the timing and length of trade negotiations, impact on the UK government and the relationship a departing UK will want with the EU. However, we believe the biggest long-term risk may be around political contagion. If Britain establishes a clear exit path out of the EU, it's possible that Britain may not be the last member state to depart from the EU. At the same time, it is possible that the remaining 27 countries bind together and unite politically to strengthen the union. This outcome would become more likely if Britain struggles throughout their "break-up" with the EU. Only time will tell.
We are disappointed in the outcome today, and believe it was a short-sighted decision on behalf of the UK. However, Britain has prospered on its own for centuries and we do not see any fundamental reason why that will change going forward. For that reason, we believe a significant market sell-off could create long-term opportunities in many global assets classes, particularly non-US stocks. We are prepared to take advantage if this occurs with the built up cash allocation in our models. As we have preached time and time again, markets often overreact in the short-term assuming the worst case scenario. Investors who remain calm and focus on the longer term horizon can possibly benefit from such volatility.