Markets around the globe overnight and today are responding to Britain’s decision via referendum to begin the process of exiting the European Union. We discuss this in more detail below, and make the case to maintain a broadly diversified investment approach amid the current volatility. We are not recommending taking immediate action within portfolios.
Yesterday, Britain voted in a referendum to leave the European Union. Subsequently, David Cameron committed to stay on as prime minister until a new transitional government is formed, but notified that he would ultimately be resigning within the next few months. Prime Minister Cameron had been a vocal proponent of remaining in the EU; his departure is not a surprise with the referendum decision to leave.
Markets had been volatile in the preceding weeks leading up to the vote as polls vacillated between likely outcomes. Earlier this week global markets had been rallying substantially on the expected outcome of Britain remaining in the EU; today’s selloff is resetting expectations and nullifying the previous gains.
What it means
Yesterday was simply a referendum and does not start any formal process or have immediate implications for trade, immigration, or markets. Under “Article 50” of the Lisbon Treaty, a country wishing to leave must provide formal notice and is then given two years to negotiate an exit and new trade deals. Britain might not invoke Article 50 until later this fall, when a new regime is implemented, to allow as much time as possible to begin negotiations. To reiterate the point: Britain is still a member of the EU, will still have access to all the same markets, etc., until the formal process is followed over the course of the coming years.
We think it is important to note that while Britain is a member of the European Union, they did not adopt the Euro and become a member of the Eurozone. This should make a withdrawal relatively simpler, although there will likely be much press in the coming weeks and months about this setting the stage for additional referendums and potential departures—potentially even from Eurozone members. It is too early to call that; we believe it is likely policy makers all over the world but especially in Europe will seek to present a unified front, potentially relax some policies, and prevent additional departures.