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Why the Brexit still matters to every investor

Brexit
Brexit


By Kevin Mahn, CIO, Hennion & Walsh Asset Management

Did the Market Already Forget About Brexit?

Markets raced downward following the surprising vote by Great Britain to leave the European Union (EU) on June 23, 2016. A lot of the trading activity that took place was attributed to traders reversing their positions following the “leave” vote, which came in after believing that Great Britain was going to vote to “stay” within the EU — a position that then Prime Minister David Cameron was championing.

However, since the proximate days following this historic vote, the markets have essentially shrugged off this event, making us believe that the market may have already forgotten about Brexit. This would be a mistake in our view, as this vote will likely have both short and long term implications on worldwide stock markets as well as the economies of Great Britain and the eurozone as a whole.

From an investment viewpoint, trade and economic growth are at the heart of the potential implications of the “leave” referendum vote in England. As a result of Brexit, Great Britain will have more control over the negotiation of their own trade agreements and immigration policies, and they will also be able to redeploy the eventual savings of their EU membership to other areas of their economy that they feel would be more beneficial to their own citizens.

It remains to be seen how other European countries will treat England from a trade and diplomatic relations standpoint following this vote. According to BBC.com, approximately 28% of what is produced in Great Britain is sold abroad. Interestingly, while about half of this overseas trade in the United Kingdom (UK) is conducted with the EU, England imports more overall than it exports to the EU. Hence EU country members need Great Britain as much (and perhaps more) as Great Britain needs the EU from a trading relations standpoint.

As we move closer to the date of the actual Brexit date and the market starts to focus on potential Brexit implications again, we believe that there will be a great deal of uncertainty, and potential volatility, as the world tries to come to terms with how this very public divorce will take place, and if any of the other 27 remaining EU countries will look to follow suit and leave the EU themselves.

It is important to remember that although Great Britain was a member of the EU, it did not use the euro. Nine other countries that are members of the EU also do not use the euro as their currency (Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Lithuania, Poland, Romania and Sweden). A lot of the Brexit talk may not start to intensify for quite some time though, as current Prime Minister Theresa May has recently said that she will trigger Article 50 of the 2007 Treaty of Lisbon (the official step to begin the two year timer for orchestrating the exit) by the end of March 2017. This would mean that Britain would likely be on schedule to leave the EU by March of 2019.

Profiting as the actual Brexit nears

While the days of international market and foreign currency volatility are not behind us, I do believe that as more clarity is provided around how, and when, Brexit will play out—coupled with continued measures of stimulus on the part of Mario Draghi and the European Central Bank (ECB)—it will create opportunities for investors in the years ahead as part of a globally diversified portfolio strategy.

In this regard, many international markets have lower valuations than US stocks presently and could be in a position to outperform in the years to come—similar to how they did from 2001 – 2007. During this seven year stretch, the S&P 500 Index (^GSPC) returned 3.3% per year. But, over the same time period, developed international markets, as measured by the MSCI EAFE Index, achieved an 8.8% annualized gain, and emerging market stocks, as measured by the MSCI EM Index, gained 24% annualized.

Please note: The S&P 500 Index is a market capitalization-weighted index, composed of 500 widely held common stocks, including reinvestment of dividends that is generally considered representative of the US stock market. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed market, excluding the US and Canada. The Index consists of 24 developed market country indices. The MSCI EM Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The Index consists of 23 emerging market country indexes. Past performance is not an indication of future results. You cannot invest directly in an index. Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with the themes discussed above.