Europe

What does Brexit mean for investors?

Brexit-Control
Photo: David McKelvey

In a surprise result, the British people have just voted to leave the European Union. This is a hugely important and historical moment for the country, the EU and ultimately the world. Emotions are running high, the pound is running low, gold has spiked. British and EU politics have been left in turmoil. There will be a period of uncertainty and adjustment, but it will all work out fine in the end.

The final polls predicted that Britain, my own country of birth, would vote to remain in the EU with 52% of the vote in favour, and 48% voting to leave. Betting odds, which have proved more reliable than polls in some recent elections, pointed to an 85% probability of staying in the EU. Both were completely wrong.

In the event, 51.9% of the British voted to leave the EU, and 48.1% to remain. Before I look at what’s happened in markets, it’s worth looking more closely at what’s being going, to put everything in perspective.

The British people have looked the political establishment in the eye and given them a large slap in the face. The establishment is reeling with shock. Even the main leave campaigners seem surprised and stunned by their victory.

Of course it was pretty close. If only 1 in 53 people had voted the other way then Britain would have stayed in the EU. Whichever way it went, just under half the country would have been disappointed. Now the two sides need to mend fences and bring everyone back together again.

British people have a reputation for being cold and unemotional. “Stiff upper lip” and all that. But many are angry or afraid by the implications of the result.

British people have a reputation for being cold and unemotional. “Stiff upper lip” and all that. But many are angry or afraid by the implications of the result.

Most of the cappuccino drinking classes are either crying into their overpriced foam, or hurling their cups against the wall. One British friend of mine who lives in London described the mood as “sombre”, and reported people crying in the office.

British politics has just been turned upside down. The prime minister David Cameron, who led the remain campaign, has announced he will step down by October. A vote of no confidence will be taken on the leadership of the main opposition Labour party, led by Jeremy Corbyn. He also campaigned to remain but is felt by many in his party to have done a poor job.

Scotland voted strongly to remain in the EU. The expectation is that Scots will now demand a second referendum on whether they remain in the United Kingdom. The idea being that if they choose to leave the UK they can then apply to rejoin the EU. Certain voices are asking for a referendum in Northern Ireland as well, a region that also voted to stay.

It’s entirely possible that the United Kingdom of Great Britain and Northern Ireland – to give it its full title – will consist of only England and Wales within a few years. Still, to put that into perspective, those two countries contain 89% of the current population of 65.1 million.

This is momentous stuff. In terms of historical importance it’s comparable to when King Henry VIII broke with the catholic church in Rome in the early 16th century. At that time the European overlords were found in the gilded passageways of the Vatican. Nowadays they are found in the marble lined hallways of Brussels.

The good news is that, this time around, there will be a lot less looting of monasteries, and many fewer heads will be severed from their necks. Samantha Cameron, the prime minister’s wife, looked upset but likely to remain intact.

The implications for the EU are also huge. The block will lose its second largest economy and a territory with 13% of its population. Disenfranchised people across many countries in Europe will feel emboldened by the direction chosen by the British. Britain may be the first of many to go.

Campaigning was intense, and too negative and emotional for most people’s taste. Last week the momentum was behind the leavers, until a pro-remain member of parliament, Joe Cox, was murdered in the street by a deranged man.

Then, on voting day, torrential rain and flooding in London and the South East may have affected turnout in a region seen to have a high support to remain. The potential impact of the weather will probably be analysed for months.

But in the end the vote split the main political parties down the middle. People of both left and right persuasions voted on both sides of the fence.

The group most united in its desire to stay in EU was the political class in London. They have comprehensively shown how out of touch they are with much of the country. Unfortunately, now it’s down to them to organise the actual process of leaving the EU, even though it’s not what most of them want.

Markets were all over the place as the results came in. The British pound initially rose when the final polls indicated a favourable result for remain. But initial results took it down as leave took the early lead.

Then remain came back as more results were counted. But as the night went on the leave campaign appeared to have pipped it to the post. First the pound was down 3%, then 5%, then 9%….and at one point 11%. It’s at the lowest level against the US dollar for three decades. Bad news for British holidaymakers heading to Europe over the summer. Good news for exporters and inbound tourists.

Stock markets took a whack as well. The FTSE 100 index of British stocks was down 8.5% after opening, although has settled around 4.5% down as I write. European stocks are down around 6%. US stocks are currently down 3%.

If the turmoil continues – as the actual details of the exit process are negotiated in coming months and years – there could be some great investment opportunities in British and European stocks. I’ll be keeping an eye on things.

I’m sure that there will be a difficult period of adjustment for Britain, its people, and its economy. But in 10 years time the British will look back and wonder what all the fuss was about.

Meanwhile, gold fulfilled its safe haven status and jumped 5.4% to $1,327 per ounce, and up much more in British pound terms. (If you missed my recent special report on The Best Ways to Invest in Gold, you’ll find it  here.
It’s been a dramatic turn of events that has left many people shell shocked. I’m sure that there will be a difficult period of adjustment for Britain, its people, and its economy. But in 10 years time the British will look back and wonder what all the fuss was about.

A now a message for any European friends – British or otherwise. Be nice to each other. Just because the British people have voted to leave the political construct known as the EU does not mean they don’t like their European neighbours.

Keep calm. Carry on. What’s done is done. Look to the future.

As for the markets, there will be plenty of uncertainty and volatility for some time to come. That spells opportunity for investors, sooner or later.

Stay tuned OfWealthers,

Rob Marstrand

robmarstrand@ofwealth.com

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.