By David Nelson, CFA
Thursday, June 23 will go down in history as Britain’s Independence Day. Understandably, fear and confusion over just what a Brexit looks like will weigh on all parties in the weeks and months ahead.
I'm sure when the United States declared its independence there were many saying it would be an economic disaster. We went on to become the most powerful economic engine the world has ever known.
In the wake of Friday’s aftermath, it was hard not to notice that the FTSE was holding up better than most markets on the continent. I suspect that with the British pound down to a 30-year low, investors understand that it should help British exports. It remains to be seen just how much help the weaker currency will be in the long run.
For the EU, this is a gut check. In my humble opinion, Britain won’t be the last to exit. Without significant changes, other countries will consider an exit as their best option. Already, nationalist parties throughout the continent have petitioned to hold exit referendum’s similar to the Brexit.
In the end, I believe there’s “life after divorce.” It’s in everyone’s best interest for trade to go on. Treaties will be re-negotiated under Article 50, which probably comes into play in October when Prime Minister Cameron steps down. The process could take as long as two years.
You’re going to hear a lot of people do an about face in the days and weeks ahead. We’ve already seen a reversal from U.S. President Barack Obama. It wasn’t that long ago when he was saying Britain would have to go to the back of the line. Today, he says that our “special relationship will survive."
There’s a strong parallel between what’s happening in Europe and our election cycle here. Unchecked immigration and too many regulations has set off a populist wave that has already toppled one major government—Who’s next?
The man on the street
A couple of weeks ago, one of the international managers at my firm was in London and made the following observation: It's clear politicians and business leaders want to remain, but the man on the street dealing with the day-to-day challenges want out.
Putting it in perspective
Over the last week, markets had priced-in a remain victory, so a big part of Friday’s 610 point fall in the Dow Industrials (^DJI) was unwinding that trade. The polls and bookies were 180 degrees wrong. What does that say for the polls here?
The knee jerk reaction will be to punish Britain, and some heads of state have spoken to that end. I think those voices will soon be drowned out as leaders get down to business.
Rejection of the political elite
This was not only a rejection of the EU, but also a rejection of the political elite. There’s a huge parallel between what just took place in Europe and our election cycle here.
Both here and abroad, there is a large group of citizens who feel government has turned a deaf ear to their causes. Again, the concerns around unchecked immigration resonates across oceans. When Brexit voters were confronted with evidence that it may hurt the economy or markets, their answer was, “I don’t care. It’s already bad, and I’m ready to roll the dice."
In the long run, I believe this can be good news for all parties. It’s a wake-up call for Britain, but it's also a wake-up call for the eurozone. Over the weekend, the six original member countries of the EU—Belgium, France, Germany, Italy, Luxembourg and the Netherlands—are all meeting Saturday in Berlin to chart a course forward.
It’s safe to say that traders will be up late Sunday evening preparing for Monday’s open.