Insights on the Brexit vote from our sister company, Horizon Advisors:
The United Kingdom decided yesterday, in a in a highly anticipated referendum, to leave the European Union. The rationale, among those who favored leaving, was a desire to break free of trade rules and restrictions imposed by the E.U.’s central governing body and return decision-making to the U.K. Most pundits expected a narrow victory for the “remain” sentiment, so the outcome of the election caught most investors off-guard and capital markets around the world have responded with significant declines.
We feel that today’s market sell-off is an over-reaction that will ultimately prove short-lived. In the near-term, this change will have a negative impact the U.K. economy, and to a lesser extent, the European economy. We expect little impact on the U.S. economy, and longer-term, we do not believe this will have a significant impact on the global economy, although things may continue to be unsettled and volatile for some time.
An important detail that has been largely under-reported by the media is that the official separation from the EU will not happen overnight. It won’t actually occur for two years. In the meantime, the U.K. will have plenty of time to negotiate new terms with their trading partners, greatly reducing the likelihood of a “messy divorce” with the E.U.
Although the market has reacted to this news as though it were a financial crisis, it is better characterized as a political crisis. The “Brexit” bears no resemblance to the Lehman Brothers bankruptcy or the European Debt Crisis(es) of recent years. The people of the U.K. decided for themselves to leave the E.U. because they believe it is in their best long-term interest. The full impact of their decision to leave the E.U., whether good or bad, will not be fully realized for many years.
Today’s market activity highlights the value of diversification and the importance of selecting a portfolio allocation that matches your unique circumstances. Most of our clients have a portion of their portfolio allocated to high quality bonds that tend to hold their value during periods of volatility. We also pay close attention to our clients’ liquidity needs. Money that’s needed in the short term is not exposed to significant market risks. Further, in every case, our clients’ investment horizon is measured in years or decades, and not months or quarters, so there is no need to be anxious at the short term gyrations of the market.
Thank you very much for your continued confidence in our service and advice. If you would like to discuss our opinions, outlook, or your portfolio in greater detail, we would be happy to schedule a meeting or a conference call at your convenience. Lastly, don’t keep us a secret. If you know someone who is in need of financial advice, we will be pleased to speak with them to see if we can help.