Last 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.
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.
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 %|
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.