Keep calm and Brexit

Keep calm and brexitLast week the UK voted to leave the European Union in a national referendum nicknamed Brexit. The financial markets didn’t anticipate (or want) this outcome and it shook stock markets around the world.

So what does this all mean and will it affect my future investing decisions?

The Brexit question

On June 23rd around forty nine million people in the UK were asked a simple question:

Should the United Kingdom remain a member of the European Union or leave the European Union?

1. Remain a member of the European Union
2. Leave the European Union

The answer: “Leave”

In response, 51.9% of voters answered “Leave” and 48.1% answered “Remain”. The voter turn-out was very high with around 71.8% of eligible voters casting a vote.

Polls in the UK before the vote suggested that the Remain campaign was trending higher, especially after the tragic and senseless murder of Jo Cox, a Member of Parliament.

The Brexit question split the country in many different ways. Scotland & Northern Ireland as a whole wanted to remain in the EU, as did London; the rest of the UK wanted to leave. Younger people in general wanted to remain (the EU is all they’ve known); older people wanted to leave. Even in the political spectrum there was a bi-partisan divide, with members of all major political parties taking different sides.

The UK Government of course wanted to remain, having negotiated some possible compromises with the EU earlier last year but were required to hold a referendum from an election campaign promise. Prime Minister David Cameroon, who championed the remain side, announced he’ll resign in October as a result of the Brexit decision.

Why leave?

The Brexit result was unexpected for many political and economic experts who predicted a Remain result. Was it in response to concerns about Immigration, increased EU bureaucracy, a sense of Nationalist pride or a general dissatisfaction with the “political elite”? The answer is probably all of the above; we’ll never really know. But in my view, an average person is going to answer the Brexit question simply based on their impression of the EU as well as how “British” they feel.

Now I mentioned that the voter turnout was 72% which is the highest turn-out since the 1992 election. Sadly it means that more than one quarter of voters did not vote on this historic question. Seriously? It’s a shame that democracy is taken for granted. Now I’m not politically active in any way, and the choices I face in the upcoming US presidential election are unappealing to me. But I will vote since abstaining achieves nothing.

The Fallout

There are many fallouts from this vote. For one, the British lost their right to complain about American stupidity.

More seriously, the UK is the fifth-largest national economy in the world (second-largest in the EU) based on GDP, making up around 4% of the world’s total GDP. Leaving the EU is a big thing since trade agreements will need to be re-negotiated and around 40% of the UK’s laws will need to be reviewed / re-written. Even the timeline of when this all happens is unclear – there’s a two-year exit period but it only starts when the exit clause of the European Union treaty, aka “article 50”, is invoked.

And it’s not over yet. Northern Ireland & Scotland are threatening to vote for Independence so they can ‘rejoin’ the EU and there’s already voters’ remorse with a second UK referendum being petitioned because some people didn’t like the result of the first one.

Back in the EU, a general unease with the EU could spread to other European countries such as Spain, Sweden, Portugal, France and even Germany holding their own referendums.

And the world is now apparently more likely to enter a global recession even though the UK can’t leave the EU for another 2 years at least and no changes have been agreed at this point. To be honest I trust global macro-economic forecasts as no more accurate than a weather prediction over the same time period.

All of this means lots of uncertainty for the foreseeable future, and uncertainty translates into higher volatility for the Financial markets.

Friday’s effects on my Income Fund

Speaking of volatility, my Income Fund was hit quite hard on Friday as I have a fair amount of international exposure. Here’s the fallout from Friday.

Symbol Type Market Value Day +/- Day %
VHDYX US Stocks 85,367 -2,772 -3.25%
VIHAX Intl. Stocks 41,046 -3,658 -8.91%
VWESX Long-Term Bonds 12,308 103 0.84%
VWEAX High-Yield Bonds 52,081 -552 -1.06%
Stocks US Stocks 40,503 -1,101 -2.72%
Cash Cash 12,824 0 0.00%
Total 244,130 -7,980 -3.27%

So the immediate Brexit impact was nearly $8,000 or a little over 3% overall, which isn’t so bad although we’ll see how next week goes. More importantly, dividend income is unaffected right now so lower prices just mean better valued purchases.

I was busy at work on Friday so I didn’t get chance to buy more shares in VIHAX which I wanted to. I did make a small $500 purchase of VIHAX for Monday and I’ll be buying more in the coming weeks as I re-balance back to my target 2:1 ratio between International and US stocks.

Going forward, I’m not making any change to my Income Fund investing strategy because of Brexit. I’m staying with my target asset allocation and continuing to put proportionately more new money into the under-weighted investments.

As with any ‘bad’ financial news, simply ignore the noise from the doom and gloom headlines – stick to your investing strategy and don’t try to guess what the market might do next week.

My personal view

Although I’m a British citizen, I did not vote in the Brexit referendum. I’ve been away from the UK for more than 15 years and as such, I wasn’t eligible to vote. So my view is probably a little distant as a result. Had I voted I would have chosen to leave the EU but of course had I actually lived in the UK for the last 20 years I may have felt differently than I do now from afar.

In my mind continued membership of the EU comes down to a simple question – “do you believe in a United States of Europe?” If yes then be “all in”; continue on a path to give up national identity and have an elected Federal government with representation. If no, then leave.

The UK has always been a euro skeptic country with limited participation. The current status-quo; a mix of trade laws, regulations, civil rights and border controls, is a stepping stone to a larger grandiose goal. But it’s a very shaky step because of unequal economies and cultural differences within the member countries. Hopefully Brexit will cause future reforms in the EU, but trying to achieve political integration instead of just trade cooperation when member countries have strong national and cultural identities is always going to cause friction.

Although I favor Globalization in the sense that I think it’s better to have larger countries than smaller ones, I suspect the EU needed the UK more than the UK needed it. The UK has a permanent seat on the UN security council and is a member of NATO for defense. Trade is simply business – it’ll be negotiated since Europe wants to sell its products as much as the UK does.

Regardless of Brexit, life will go on and the economies of the world will rise and wane as they always do. Maybe the EU will prosper more and the UK will not; maybe it’s the other way around. Or maybe some other event will overshadow this one. The future is always uncertain and volatile, so keep calm and don’t panic, follow your investing plan and look forward to Brentry as the UK enters a new journey in its long history.

Update: This World Party song seems to sums things up pretty well

How did you react to Brexit?


Quote of the Day

The future is no more uncertain than the present.

12 thoughts on “Keep calm and Brexit”

  1. “I favor Globalization in the sense that I think it’s better to have larger countries than smaller ones”

    I’m a fan of the Star Trek model where all “countries” are just regions on earth like Kent or Essex or Florida, there is a single global government, and poverty and lack have been consigned to the dustbin of history thanks to robots, AI, nanotechnology and other things we have yet to invent.

    So I voted in, as I would prefer to see a federal Europe on route to a federal Earth, since history shows that federations are almost uniformly less violent than separate “sovereign” regions.

    However, perhaps the existing EU model was not up to the job. It may be that the UK voting to leave is just the catalyst which was required in order to force the EU to evolve into something better. Then, perhaps 20 or 50 years from now, the UK population may choose to rejoin a much improved and more democratic EU version 2.

    I certainly hope so.

    1. Hi John,
      That’s how I think too. The Brexit vote, at least in my mind, was really about belonging to a United States of Europe (or not) as you mention. I think that the EU needs reform and that in this case, actions speaker louder and clearer than long debates in the European Parliament. It is a shame though since I think it’s harder for a country to join such a union in the first place, and now the UK has lost all the work that’s gone into being part of it.

      But I remain optimistic and hopeful that things will sort themselves out in the long term, and that maturity and common sense on both the UK’s and the EU’s part will drive future negotiations.

      Thank you for stopping by and commenting.
      Best wishes,
      – DL

  2. Ciao DL,
    I wrote a long piece on Brexit, but generally speaking I am not happy about it, I consider it a major step back, both economically and socially.
    Economically you are totally right, things will sort themselves out, socially I do not know. I was not expecting a support to extremist right wing policies from the UK, because you have to admit that Farage is the real winner of this referendum, and the message that it all sends is very “wrong” and doesn’t create anything good in terms of relationships between countries.
    We are surely in for a ride, losses will pile up in the coming weeks, but the long term effects are yet to be seen I guess… The positives that I can see is that now EU has to pull itself together and go for a stronger integration.
    But for the UK, getting this burden now that the economical situation is not clear, without a real plan to go through this divorce (I have the impression that the “leave” campaigners didn’t expect to win), with Scotland and N.Ireland wanting to leave the union… Honestly, I still don’t get it.
    Ciao ciao
    Stal

    1. Hi Stal,
      Yes I enjoyed reading your post and you make very good points. I also expected a “Remain” outcome since typically the “devil you know” is better than the “devil you don’t know” for someone that’s undecided. There will be much introspection in both the UK and the EU on what this all means and what lessons to learn. It’s certainly a leap of faith for the UK – there’s no way to predict the long-term impact of the UK leaving, nor what it might be able to negotiate.
      Best wishes,
      -DL

  3. HI DL,

    well, I didn’t react at all as I believe that best decisions (not biased) are when market is calm. On the other hand look, so many companies with no/little exposition to UK were hit on Friday that I think that some interesting opportunities will come. Even if we consider UK one of the biggest economies the population is not proportionally high. Even if consumer confidence decline the impact on many consumer related companies should be limited and I would treat this decline as an opportunity. The problem is most of companies are still very expensive…

    Best regards,
    DividendTIME

    1. Hi DividendTime,
      Thanks for stopping by – that’s the perfect reaction to all this noise 🙂 The impact of the UK’s decision on US trade does seem to be disproportionate but I think it’s a reaction to the fear of a global recession. The market decrease means that the majority were selling stocks and moving to ‘safer’ assets such as Bonds and Gold. I trust that any shares I own today will still be providing income for the next 30 years’ so any market drop now is a good thing and a reason to buy more, not sell in order to buy something else.

      Best wishes,
      -DL

  4. DL, thanks for the article. Having studied in the UK during my younger life, I am a little shocked with the results. I guess I was living in London and it was easy to connect to Europe via the Chunnel.
    Anyway, a lesson for all of us is to vote wisely – I read articles where people voted for exit expecting the results to be remain.
    In any case, the market has opened up si some opportunities ahead.
    D4s

    1. Hi D4s,
      I was very surprised too. Exact demographics of the vote won’t be known since it’s a secret I think, but polling suggested that younger voters (who mostly wanted to remain) had much lower turnout than older voters (who mostly wanted to leave). It underscores the importance of voting for what you want (or sometimes don’t want) to have happen rather than sitting on the sidelines. Likewise voting as a “protest” thinking it won’t count is another weird reason to vote in my mind. I am curious how the US election will go now, considering that polls haven’t been all that accurate of late.

      I hope you’re able to take advantage of the lower prices.

      Best wishes,
      -DL

  5. As an American I am not sure my opinion counts too much (nor could I possibly have a sense of what is going on in the country), but this doesn’t seem too shocking to me. I couldn’t imagine a situation where there is another level of bureaucracy over US, Canada and Mexico whereby sovereignty was given up. The thought of a Canadian official telling me/us/USA how to control its borders is mind boggling

    1. Hi Evan,
      Yes that’s certainly a large part of it. The EU (or Common Market back then) started out simple enough – kind of like the NAFTA trade agreement between the US, Mexico and Canada. Then came the single currency and in 1997, more political and social oversight. The long-term goal is a United States of Europe where the sum is greater than the individual countries and by extension, the national governments essentially becoming state governments. Still, the UK is in turmoil / regret about this vote and I don’t think it’s over yet by any means.
      Best wishes,
      -DL

  6. Hi Dl,

    great article!

    Out of this Brexit chaos look like is a good time to go work in Uk as a lawyer. Rewrite 40% of the actual law need a huge task force.

    I just wrote an article about new opportunities after Brexit, this morning I was starting to implement the new strategy and I realized my broker in Hong Kong don’t cover UK.

    Now I’m looking around frenetically a new broker to expand my investments. I’m in doubt between DiGIro, Linx and Interactive-Brokers.

    I would like Giro because look like they are going into any markets (Russia is my next step after buying in UK) but I’m concern about deposit guarantee.
    IB seem cheap and well establish, but is in US, not so keen.
    Maybe Linx?

    Great blog and I’m going to share this post.

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