We urge perspective. The UK is not leaving Europe. That would be geographically impossible and economically disagreeable. Rather, British voters are walking back from the EU. The great continent and durable culture of Europe is thousands of years old. It continues. The EU and its flag, distinct from the earlier European Economic Community, is simply a struggling political superstructure that has been in existence for a mere 23 years.
If diplomacy’s sensible, through wit and wisdom, commerce will continue over automobiles, wine, vacations, films and financial services. Indeed, Norway already offers a template for European trade and integration without EU membership.
Still, in the immediate fright, the pieces of the EU were no more highlighted than in the change of 10-year government bond yields on June 24th, as strong countries stood apart from weak and investors flew to safety:
To be sure, the 52% to 48% Brexit referendum causes an immediate political fallout. Already, David Cameron announced his resignation as prime minister and Conservative party leader. And, Britain’s exit will cost the EU one of its biggest military powers and one of its wealthiest members.
Overall though, we believe that the direct economic impact of Britain exiting the EU is likely not material to the global macro-economy. In our view, the greater risk comes from the potential tightening of financial conditions should more countries decide to exit the trading block.
In the near term, market volatility will most likely remain elevated and central banks will be accommodative. Such conditions may present unique buying opportunities over the next several months as equity valuations contract and the pursuit for yield continues in an ever low and diminishing interest rate environment.
Over the longer term, investment reward accumulates within a diversified portfolio that is disciplined and devoted to a risk/reward plan.
It is vital that all parties concerned, from central banks to policymakers in the major capitals, take the necessary steps to avoid a repeat of the Lehman collapse which triggered the 2008 global financial crisis. And the UK needs to remain engaged, open and, in the best spirit, pro-European. That way lies the future.