The British vote to leave the European Union (Brexit) has shocked global stock, bond, currency, and commodity investors, who in recent days had invested strongly in anticipation of a vote to remain in the Union. A Brexit will have wide-reaching effects, including the disruption of free trade with Europe, hundreds of billions in government financial cooperation, and the status of millions of ex-patriates living throughout Britain and the EU. Today’s dramatic decline in the U.S. and international stock markets, the plunge in sovereign bond yields, and the roller-coaster volatility in currencies reflects this enormous political shift and has understandably triggered heightened anxiety and uncertainty.
Clearly the vote marks an historic event for Europe and will have a significant political and economic impact on Britain and the Euro Area for years to come. We now find ourselves in an unprecedented situation and we are cautiously aware of the potential for unanticipated consequences that invariably flow from such an event. On its own, we believe a British separation from the EU would not create global or U.S. recessions or bear stock markets. Yet, we acknowledge that an excessive flight from the British pound and the euro to safe haven currencies could lead to the downturn that investors fear. As this situation develops, global economic conditions and financial markets will need to be monitored closely and investors should remain ready to adjust their portfolios if necessary.
In the long run, we expect the response from central bankers, politicians, the business community, and investors to result in the restoration of orderly, less volatile markets. In the short term, however, the fallout from this vote continues to be fluid such that rushing to reach conclusions now regarding the appropriate investment strategy would be highly problematic. Consequently, we recommend that investors remain patient and vigilant, and avoid the temptation to view the current circumstances as either a buying opportunity or as a need to take strong defensive action. As always, equity investors should emphasize quality in security selection and remain broadly diversified.