Brexit –The Aftermath

June 23, 2016, will be forever etched in our memories as the day England chose to leave the European Union(EU). It was a move that sent shockwaves across markets all over the world. Earlier that same day, the market predicted that they would remain in the EU, and stocks, commodities and bonds rallied across the board. However, this was short-lived, because, in an unprecedented move, the unthinkable took place.  Analysts had, by and large, hoped for the best outcome (remaining) and had not given any serious thought to the aftermath of a Brexit. As Asian markets opened on the night of June 23^rd, there was wide-scale pandemonium. Stocks plummeted, the Pound fell, and gold soared, as investors scrambled to safety.  I am confident that there were many traders who were unable to sleep, such is the extent of the blow. 

Lessons from Subprime

The first question on everyone’s mind is what will happen to assets? We can only look at the past to get a guide, albeit a flawed guide to forming reasonable expectations for the future. The Subprime crisis taught us that this world is highly intertwined. Catastrophic events in one section of the world, can and are likely to affect other seemingly unrelated places. However, it is very difficult to say, exactly how each country will be affected. While the pundits may be able to name specific, obvious outcomes, it is the indirect outcomes that are most dangerous as they are extremely difficult to identify and to quantify. It also showed that effects are sometimes delayed, thus it may take quite a while to correctly assess the full extent of the fallout.

There are far reaching political consequences which will be felt in the short term as Scotland has reiterated its intention to remain in the EU and therefore will split from the UK, in addition, Ireland will be seeking reunification as they had been split apart in 1921. This is against the backdrop of the EU stating that England will not be given the option to return should they change their mind. There are talks that other countries may opt out of the EU as well, however, that remains to be seen.

There are implications for the US Federal Reserve, which had been previously forecasted to increase rates this year, however, they are likely to stay put and have gone one step further to commit to providing liquidity, in the event that it is required to stabilize markets.

The demographics show that the older people, especially in the North of England, were the ones who pushed for leaving the EU, and the younger people who had only known life under the EU chose to remain. One commentator rudely remarked that “they are losing one million jobs to save one job!” History is likely to be unkind to British Prime Minister David Cameron, who is also stepping down in the aftermath of the Brexit. Christine Lagarde, head of the IMF predicted potential large and negative effects following any exit.

What does it mean for your investments?

The largest consequence is tremendous uncertainty, which naturally leads to volatility. Volatility is such that many people will become nervous about their investments as most will fall in the short term. However, there are others who are excited right now and hoping to pick up quality assets at much cheaper prices. If you are in a quandary, it would be useful to examine your direct exposure to England and ascertain whether the assets in your portfolio have good fundamentals. For the assets with the strong fundamentals, you can pick up some more and reduce your average cost, this strategy could play out well.  However, timing is everything, knowledge is all. It is critical to get as informed as possible about the likely effects this move will have and this will take some time.  Things may get worse before they get better, so tread carefully, but not too carefully, because there are sure to be opportunities. Happy Investing!

Yanique Leiba-Ebanks, CFA 

Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at info@sterlingasset.net.jm