Wise Wealth Management

Dennis Covington | Principal

Insights on the keys to enjoying a "healthy wealth".

Britain's Exit from EU

July 2016

You’ve heard us say before that “markets don’t like uncertainty”. Events that create uncertainty invariably lead equity markets to trade lower in the short term and Britain’s exit (Brexit) from the Europe Union (EU) definitely qualifies as that type of an event.

The uncertainty created by Brexit creates some very basic questions:
• How long will the uncertainty last?
• How will it impact trading around the globe?
• Will other countries exit the EU?
• How will it impact the global economy?

Brexit will require the U.K. to renegotiate their trade agreements with other countries. History shows this will take years to complete. In 1973, Britain first joined the predecessor organization to the EU, the European Communities. In 1979, the European Monetary System was launched. In 1993, the Treaty on the European Union was signed. The Euro currency was launched in 1999, but most countries didn’t replace their national currencies with the Euro until 2002. Great Britain never adopted the Euro.

In the short run, we can expect more day-to-day volatility of stock prices, as well as currencies, which can particularly impact the international stocks we all own. We can definitely count on the financial press to exploit this new “crisis” with breaking news alerts and special reports aimed at driving up ratings.

When events like this happen, we find it helpful to think about the companies that make up “the market”, rather than just “the market” itself.
• Does Brexit impact the number of Coca-Cola’s that Europeans will drink post-Brexit?
• Will BMW or Mercedes sell fewer vehicles?
• Is it possible that foreigners will actually buy more from Great Britain since their currency has devalued?
• Are you truly thinking differently about where, and on what, you will spend your money this morning?

Capitalism is the free enterprise system in which the world’s businesses are controlled by private owners for profit, rather than by the state. Capitalism has shown amazing resiliency to weather uncertain times created by world wars, assassinations, natural disasters, economic recessions, credit downgrades, housing crises, etc. and march onward to reward investors who invest or lend their capital to these businesses. Our faith in this system and our belief that clients will be rewarded is not shaken by Brexit. History and data are certainly on our side.

The outcome of the Brexit referendum was always expected to be very close. On balance, the market anticipated a “Remain” vote. When this didn’t happen, the opening market prices reflected the outcome. However, we do not believe it is prudent to make changes in response to this new information. Changes to your long-term strategy should only be made based on changes in your own personal situation and your goals.
 

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