Polling is never a sure thing, there is always a margin of error. What we saw Friday morning is as big of an upset as anyone could have expected. The United Kingdom has voted to leave the European Union (EU). This is the first time a country, inside the EU, has voted to leave the politico-economic marriage of 28 European countries. However, it’s not the first time it’s been tried. Most recently you’ll remember the talk about a Grexit (Greece) in 2015, and don’t forget the UK has tried before in 2011 (the Alternative Vote). Even Scotland tried to leave the UK in 2014. However, since it’s never happened before, the level of uncertainty in the markets have taken hold, as nearly all markets in Europe opened lower Friday and Monday. Since everyone was expecting the UK to remain in the EU, as the polls showed, Friday morning was a big knee-jerk reaction. Markets are not in free fall and it appears the world is trying to cope with what a “Brexit” means for the global economy.
Now we know this is shocking news to some, and it may be frightening to others. We’re here to tell you to keep calm, and rebalance. There is a key difference between yesterday's vote and the Alternative Vote in 2011. Unlike 2011, yesterday’s vote was simply a referendum, which means the UK government is not legally bound to leave the EU as a result of yesterday’s vote. Since it is not legally binding, the UK parliament will now have to vote on the vote’s result itself. Sounds weird, we know. The upside is that the composition of parliament has a high probability of voting to remain in the EU, despite the referendum’s plea. The downside is that the groups who want to leave, may gain control of parliament in the years to come, force the same result, and drag out the process for all of us. Even if parliament votes to leave the EU, the UK will still be a part of the EU for about two years or longer. In order for the UK to leave, it must invoke Article 50 of the Lisbon Treaty. This triggers a nearly two-year process of negotiations between the UK and EU in order to wind down all of the interwoven ties, settle debts etc. The two parties can even agree to extend the length of negotiations past two years. In our view, we believe markets are overreacting to the uncertainty this event has caused. To be fair, the gurus and the media deserve most of the credit.
To put in perspective, Friday’s market reaction wasn’t nearly as severe as August 24, 2015 when the Dow dropped 1000 points after market open. Also, all things considered, the UK leaving the EU is not a bad thing. Currently, the UK is subject to regulations, laws, and policies that originate in Brussels, Belgium where the EU holds its meetings and is headquartered. Imagine, we had an American Union between the US, Canada, Mexico, Central America, and South America. Would we, as Americans, want our way of life dictated to us by a group of bureaucrats headquartered in Venezuela or Cuba for example? We don’t think so! Now, some people are calling this the death of the EU, as it may trigger votes in other countries around Europe. However, it’s worth pointing out the fact that currently, not all European countries are a part of the European Union. Norway, Switzerland, Liechtenstein, Albania, Macedonia, and Iceland have never been a part of the EU. Not many people know this, but Liechtenstein has a higher GDP per capita than the United States. This makes it hard to believe a guru or the media’s predictions, when they claim UK’s GDP or even global GDP will drop over the next 2, 5, or even 10 years.
We’re not here to make predictions and say everything will be fine tomorrow, but we know historically that times of even greater uncertainty have been overcome time and time again. The UK leaving the EU is more than likely going to seem like a drop in the bucket in the months and years to come. In addition, let us not forget that we invest globally in 45 countries with over 16,000 unique holdings in 21 different asset categories. We are not beholden to the value of the British Pound, or strictly European equities. We will do what we have always done, buy low and sell high through rebalancing. Times like these give us opportunities to buy assets when they’re cheaper, potentially allowing for greater appreciation in the long run. We, as investors, have to have the courage to do what’s right. We will continue to invest globally, shun stock picking, market timing, and track record investing. We have the courage to stay disciplined and rebalance on the highs and lows, and we believe you do as well. The world will soon come to terms with the fact that the sky is not falling.
So in conclusion, stay calm and don’t panic. We will get through this as we have with other turbulent global events in the past. As always we are here for you and if you need to speak with any one of us, just give us a call.