In no particular order:
Scottish independence: the conventional wisdom is that Scotland will now have a referendum and vote to leave the UK and re-join the EU—even the Euro-zone. This will be messy. During the last Scottish independence vote, they wanted to immediately adopt the Euro, but Brussels said the Scots would have to apply like any other nation—a process that would take years. A new independence referendum must be authorized by the British—not Scottish—Parliament. They’re going to be pretty busy. I don’t think we will see an independent Scotland anytime soon.
European Euroscepticism: the Brexit vote strengthens the hands of those who want to see “Frexit” in France, “Nexit” in Holland, Czexit, and so on. Demands for referenda around Europe will only go up. The combination of economic stagnation at home and radical Jihadism coming from the Middle East feeds a nationalistic xenophobia that is anti-trade and anti-capital.
Interest Rates: the 10-year UK Treasury Note now yields less than 1%–down from over 2% at the end of last year. Interest rate cuts and quantitative easing from the British central bank are now likely. This—along with a falling Pound—will support the UK economy. It may stumble—after all, everyone’s going to pull in their horns a bit here—but their economy won’t fall off a cliff.
Takebacks: there are reports of people who want a Brexity do-over, who voted thinking that their “Leave” vote would lose, who just wanted to send a message. So many UK voters have signed a petition on the House of Commons website for another vote. But unless the petition gains more signatures than there were “Leave” votes—17 million—there will be no second referendum.
Silver linings: it’s possible the Brexit vote will lead to a growth in free commerce between the UK and the US, Canada, Australia, and New Zealand. The EU is statist and anti-democratic, after all. But if the forces that won Brexit did so by appealing to anti-trade sentiment, a pro-trade outcome seems unlikely. Ditto for a de-regulated City of London attracting more global banking. That’s whistling past the graveyard. “Leave” means leave.
Lehman: is this a “Lehman moment”—comparable the Lehman bankruptcy during the Financial Crisis? Like Lehman, it caught most people by surprise. Like Lehman, it was part of a larger trend. And like Lehman, there are broad implications, many most of which we don’t understand, yet. But unlike Lehman, this won’t take down the banking system. A referendum is a vote, and requires enacting legislation to implement any changes. This will take time. There is no web of short-term debt to cause a cascade of insolvency. But political contagion across the rest of Europe is possible.
Bottom Line: Brexit is neither the first nor the last word on de-globalization, Euro-skepticism, and nationalist populism. But it is the loudest voice heard so far on the global stage. And that voice is calling for change in the status quo. Uncertainty is increasing, and most investors will be looking for safety. But the best returns will come from taking careful, prudent risks.
Douglas R. Tengdin, CFA
Chief Investment Officer