After the Brexit vote, will London Bridge come falling down?
Like most observers, I was surprised by the Brexit vote. Yesterday the betting markets in London had the odds of a “Leave” vote at 25%. This morning, European markets are adjusting to the new reality: UK shares are down 5%; German and French stocks are down a little more; global interest rates are falling as investors look for shelters from the coming market storm.
EU leaders will meet next week in Brussels to determine what happens next. The most cogent economic argument that the “Leave” campaign had was that the UK would be better off if it didn’t tie its financial future to a troubled Continent. The current government, which was pro-Remain, will resign, creating a great deal of political uncertainty. Eurosceptic forces in the rest of Europe will be strengthened by this development.
UK Referendum Map. Red = Leave. Source: Politico
The result will now trigger a two-year disentangling process where London and Brussels will negotiate the terms of a messy divorce. For US companies that use the UK as a staging ground for entry into the rest of Europe, the vote will bring hard choices about what to do next. The “Leave” vote means the British access to the European market will be impaired.
This vote is consistent with the trend of de-globalization and economic populism that has grown in recent years. There are a lot of folks who have been left behind by the current economy; there are “two Americas” as well as “two Britains” and “two Europes.” The “Leave” vote will strengthen the dollar, depress interest rates, and roil the markets—something that the populists seemingly welcome—“shaking the Etch-a-Sketch.”
In the midst of the turmoil, it’s important to remember: even if the political map changes, the global economy will largely continue as it has. BAE will still build the Harrier; London will remain a center for currency trading; the UK is still the 4th largest economy in the world—although now they will have to re-negotiate their trade arrangements. But countries don’t trade with other countries—people and companies trade with one another. Governments simply assist or impair that process.
Hopefully, the British people—as well as the global markets—will take to heart the message of the old World War II poster: “Keep Calm and Carry On.”
Douglas R. Tengdin, CFA
Chief Investment Officer