Broker Check

Brexit Q & A

August 05, 2016

You’ve probably heard a lot about Brexit by now. It might seem like a strictly British affair, but it actually has profound economic implications for us here in North America. It’s our responsibility to inform you about some of those implications.

Here’s a quick synopsis: Thursday, June 23, the United Kingdom held a referendum over whether to leave the European Union. (“Brexit” is a portmanteau of the words “British” and “exit.”) Over 33 million people went to the polls, and when the dust cleared, the result took almost everyone by surprise: The UK voted to leave.

While it’s true that Brexit will have an effect on the global economy, it’s important you understand this fundamental truth: the biggest driver of doom and gloom is uncertainty. It’s the simple act of not knowing what will happen makes markets fearful.

But here’s another truth: “Nothing in life is to be feared. It is only to be understood.” The great scientist Marie Curie said that, and she was right. So without further ado, let’s have a Question & Answer session. Here are our answers to some of the most frequently asked questions we’ve heard about Brexit. Hopefully, the more you understand it, the less cause you’ll have to fear it.

Q: Why exactly did the UK vote to leave the European Union?

To answer that, let’s have a brief discussion about what exactly the European Union is.

The EU is both an economic and political union of 28 different European nations. Most of the member states share a common currency, and they work in concert to enact laws and regulations to ensure the free movement of people, goods, and services. The UK joined in 1973, but from the start, it was shaky. Only two years after joining, the UK held a vote to decide whether staying in the EU was a good idea. The majority of voters decided to remain on that particular occasion.

Fast forward to 2015. During the UK’s general election, British Prime Minister David Cameron gave voters a promise: if reelected, he would see to it that another vote would be held to settle the issue. Cameron was reelected, and, true to his word, scheduled the referendum for June 23, 2016.

Why did voters want a referendum? While the “Leavers,” as they are known, had many reasons for wanting to withdraw from the EU, a few in particular stand out: a) A desire for more national sovereignty; b) A desire to rid themselves of what they claim to be excessive regulation imposed by the EU; and c) A desire to have greater control to stop what they see as an unwanted influx of immigrants.

                                                                                                                                                                                                                                                                                                 On the other side, there were many who wanted to stay in the European Union. Choosing otherwise, they claimed, would result in millions of jobs being lost. The “Remainers” also see immigration as good for the economy, and believe the UK enjoys more influence inside the EU than out.

Ultimately, though, the “Leave” campaign won by 51.9% to 48.1%

Q: So what happens now?

Here’s the thing: nobody really knows. It’s that uncertainty that can worry the markets. With Brexit, there are so many unknowns, so many variables, so many maybes and mights. The fact of the matter is nobody knows what the UK will do next. And that uncertainty has many nervous.

We’re in uncharted waters. While European law makes it permissible for a member state to leave the EU, something like this has never really happened before. But here’s what we know for now:

  • In order to officially leave the EU, the United Kingdom must invoke what’s known as Article 50 of the Treaty of Lisbon. This essentially launches a two-year period for the UK and the EU to negotiate a formal withdrawal. Many issues will have to be settled during this period, including whether the UK will still have access to the single market, and if so, under what terms.
  • As of this writing, Article 50 has not yet been invoked, and it may not be any time soon. Many of the “Leave” campaign’s leading figures have expressed no hurry to actually start the process of leaving. There are two likely reasons for this:
  • They hope that by stalling the process, they can pressure the EU into granting more favorable terms, such as access to the single market without having to pay tariffs.
  • They are suddenly faced with the fact they may not be able to deliver all the things they promised British voters. For example, one prominent “Leave” advocate pledged to spend money that would have gone to the EU on national health services. Within hours of the referendum, he backtracked on that promise
  • In contrast, European officials are pressing the UK to start the process quickly. From their perspective, it’s better to have a quick break than a long, drawn-out divorce, which could prompt other nations to either leave or try to wrangle concessions from EU leadership.
  • To make matters more confusing, it’s not entirely certain the UK will leave at all. Technically, the referendum is not legally binding; Parliament is under no obligation to actually do anything. While it seems unthinkable the UK’s government would so blatantly deny the will of its own people, it makes an already murky situation less clear-cut.

Here’s what we don’t know:

  • Even if the UK does leave, what will their relationship with the EU be going forward? There’s a strong possibility they will continue to abide by EU rules and regulations – especially on immigration – if they want to retain access to the single market. Which begs the question: what was the point of all this?
  • What Scotland and Northern Ireland will do. These two nations, which are part of the UK but retain considerable autonomy, both voted overwhelmingly to stay in the EU. Scotland’s first minister has already declared it likely Scotland will conduct a referendum on whether to leave the United Kingdom. If this happens, expect a messy situation to get messier.

With all that said, here’s what we expect to happen: several months at least of gridlock and stalemate. Because so many questions remain, it’s likely both the UK and the EU will need time to understand what’s going on. Once the actual process of withdrawal begins, it will be some time before any real change happens. Hopefully, this will give the markets time to adapt.

Q: So what should we do?

It should be clear by now this is an extremely complex situation. It touches on geopolitics, macroeconomics, and many other terms typically reserved for college textbooks.

We wish we could tell you exactly what the markets will do or what the world will look like a year from now. Unfortunately, we can’t. No one can. And you should never believe anyone who tells you otherwise.

The answer is actually fairly simple: Focus on what we can control instead of what we can’t.

First, remember we are keeping a close eye on the situation. In particular, we will continue to monitor our clients’ portfolios. If we feel changes are warranted, we’ll let you know immediately.

Second, don’t overreact. While the media makes a living from overreacting, we know that’s one of the worst things to do. Instead, we will be careful, watchful, and analytical. We will make decisions based on strategy instead of impulse.

Speaking of strategy, we will continue to stick with ours. After all, it’s designed to see us through good times and bad. We will continue choosing investments based on whether they are in line with long term goals and other preferences; not because the media is telling us it’s time to panic.

Fourth, never forget you can ask us questions whenever you want! In the coming weeks, if you hear something scary or read a troubling article, shoot us an email or give us a call. Let’s continue to work on understanding what’s going on and why. We think you will find the more you do, the less frightening things look.

Fifth, there’s more to life than the temporary ups-and-downs of the markets. It’s true Brexit is a big deal – but sometime in the future, it will be just another item in the history book. Just because something looms large doesn’t mean it looms eternal. So go out and enjoy the summer. It’s easy for analysts and pundits to be caught in a news bubble, where nothing seems to matter – or even exist – beyond the stock ticker. But we know better. There’s a whole beautiful world outside that bubble!

There’s a lot of uncertainty surrounding Brexit right now, but it’ll clear up as time passes. We’ll keep watching the situation and stick to our strategies. As always, if you have questions or concerns – about Brexit or anything else – please don’t hesitate to let us know. Our door is always open.