Jun 24, 2016 | Post by: Roman Chuyan, CFA Comments Off on Brexit: Immediate Effect and Perspective

Brexit: Immediate Effect and Perspective

Roman Chuyan, CFA

June 24, 2016

Yesterday, the citizens on the United Kingdom voted decisively (51.9%) to leave the European Union, despite a campaign to remain in the EU led by the UK’s top politicians including Prime Minister David Cameron.  Markets reacted sharply to the news: the pound sterling lost about 10% and is trading near its lowest level in 30 years. Equity markets in Europe and Japan plunged on the heels of the result before partially recovering in recent days.

Brexit clearly reinforced trends that have developed in recent years:

  1. People are greatly concerned that the face of their country is changing. After the large recent influx of refugees, immigration issues will continue to haunt Europe.
  2. Because national identities have been politically suppressed, the integration trend of past decades is now giving way to opposite trends toward the independence of nation-states.
  3. The establishment proved to be completely out of touch with the people – academics, politicians, and CEOs uniformly predicted a “Remain” result just before the referendum.

Brexit might be only the beginning, and other political shifts are likely to follow. Cameron announced his resignation the morning after the referendum, and Scotland (which voted 60% “Remain”) is preparing a commission to evaluate if it should hold another referendum. Without a doubt, this result strengthens national movements in other European countries.

The secession of Britain from the EU will likely prove disruptive to the European and global economies, although to what extent is not yet clear. Make no mistake though – for some time now economic fundamentals have been weak, and market valuation very high.

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