Brexit and You

big ben bridge castle city

Photo by Pixabay on Pexels.com

The story of Great Britain’s exit from the European Union (EU) periodically dominates headlines and rocks financial markets.  For the individual investor, even those in Britain and Europe, the major problem is uncertainty.  No one knows how this will turn out, and what arrangements Britain will have with Europe and the rest of the world when Brexit is done.  It is pointless to guess about the possibilities.  What affects markets is not a specific possibility but rather this lack of clarity around Brexit.  This is keeping stock prices lower than they otherwise would be.  Chances are that prices would rise even if Britain got a bad deal from Europe, simply because people then would at least know what they were dealing with.  Even at that, it will take years to know the implications of any settlement.

This uncertainty has reigned since 2016, when the people of the United Kingdom (UK) voted to end their 50-year relationship with the rest of the EU. When a country, especially one like Great Britain, which ranks in the top ten economic powers in the world, changes its fundamental arrangements, many questions and concerns arise about the economic, financial, and investment implications.  Nor is it just Britain.  The UK’s economy is second only to Germany in size and power in the EU (which, American investors please take note, actually has a larger economy than the United States).  Unless Britain gets a favorable Brexit deal, it will no doubt pursue trade agreements with the rest of the world, including the United States.  Consequently, the Brexit situation has the potential to affect every economy –– and thus every market –– throughout the world.  But as I’ve said, no one can know exactly how.

Making matters murkier is that the Brexit shakeout has only just begun.  In the more than two years since the British voted to leave, it has become evident in all the failed negotiations thus far that matters were much more convoluted than anyone imagined.  Britain’s Parliament has refused to endorse any of the agreements the then Prime Minister, Theresa May, negotiated, and she resigned her office in response.  Though the new Prime Minister, Boris Johnson, has a more forceful manner, there is no indication that he will move things forward any faster than May did, or that he will have more success with Parliament.  And the recent EU elections have made it difficult to tell what its negotiators will focus on when –– and if –– they rejoin talks with the British.

Even at some distant future date, when –– and again, if –– the parties involved reach some kind of agreement, the uncertainty will linger, keeping global markets lower than they otherwise would be.  For instance, the relative success or failure of Britain may then inspire other members of the EU to consider leaving.  Already there is speculation in Italy about following in the UK’s footsteps.  Or, in another for instance, Britain may negotiate trade arrangements with Washington that give the United States leverage over the EU that it has not had to date.  There are an infinite number of possibilities, and they will push uncertainty into an indefinite future.

Because investors cannot wait for clarity on these many fronts, they should proceed with two considerations in mind:

  1. Markets have already incorporated a general level of uncertainty and have priced down assets accordingly. Almost all the news in coming months, and possibly years, will surely affect markets sharply over short periods of time, but in general the markets will always be affected by this level of uncertainty.  The advice flowing from this observation is: Do not base your investment decisions on the Brexit issue until such time when there is greater clarity.
  2. Because this eventual clarity is as likely to look good as it is to look bad for Britain, the EU, or the United States or any other economy, there is no reason to avoid these economies while framing your investment portfolio around other, more definite considerations. A good and thorough diversification along the lines described in earlier posts, most especially this one is your best answer.

This may well be a frustrating post for many readers.  It would feel more satisfying if I were to guess at a likely outcome and offer advice around it –– after all, that is what so many investment newsletters do.  But I would neither be honest nor responsible if I did that.  The best guess that even the most educated observers can offer is to exclude a few of the many possibilities that can emerge from the Brexit matter, for instance that the British economy will implode, or the EU will fly apart, or that Britain will form a new trading bloc with the United States, or many other fanciful scenarios that occasionally float up in the media.  Excluding such possibilities, however, is still not enough to guide investment decisions, except in the ways described above.

 

 

 

Leave a Reply