The impact of Brexit on American investors
The result of the United Kingdom’s vote last week to exit the European Union caught financial markets by surprise Friday morning and led to broad selloffs in global equities. Stock markets that had been rallying all week in anticipation of a “remain” outcome are quickly reversing course, and currency markets are in turmoil as the British pound dropped sharply.
So what does this mean closer to home in West Michigan?
There is a great deal of uncertainty as to how this transition will proceed over time as the U.K. will be the first country to leave the EU, and it is unclear what kind of trading arrangement will be negotiated between these two parties (and between the U.K. and the rest of the world, for that matter). The resulting uncertainty will likely lead to heightened volatility and periodic selloffs in international and domestic stock investments.
The Brexit decision is likely to have a near-term negative impact on the British economy, potentially pulling it into recession. This should not result in a direct spillover to the United States, though the larger risk is in how this decision will reverberate through the European Union, as sentiment toward the EU in many other member countries has turned negative in recent months.
There is real concern that political unrest may spread and the future of the EU could be in question. The European economy collectively is the second largest in the world after the United States, and an economic downturn there will be felt globally.
Close attention must be paid over the coming months as to how orderly the British separation is handled and whether the EU accepts this referendum as an opportunity to proactively address its constituents’ concerns.
Safe-haven investments, especially traditional U.S. core fixed income, should do very well in this tumultuous environment as investors seek stability. Diversified investors who hold bonds as part of their long-term strategic plans can take comfort from the knowledge that this piece of the portfolio will see a near-term benefit and will help to mitigate volatility in stock investments.
Furthermore, once the dust settles and the implications for the broader European Union become clearer in the coming weeks, we may see U.S. equities benefit from the strength of the domestic economyrelative to Europe, particularly for companies that are less dependent on foreign exports.
We have long advocated for international diversification within equity portfolios, and we do not recommend any changes to strategic investments based on this event. Market turmoil may prove to be a good opportunity for active managers to purchase or add to holdings whose underlying businesses are unaffected by Brexit, but whose share prices were negatively affected nonetheless.
Laina Mills is a vice president and senior portfolio manager at Legacy Trust, a Grand Rapids-based wealth management firm. She provides leadership in the development and execution of the company’s investment strategies and is a keen watcher of global markets. She can be reached at firstname.lastname@example.org.