JPS Global Investments — What to Make of Brexit

Within the next 4-8 hours or so, we will find out whether the United Kingdom will remain within the EU or not. It has been billed as a macro event that will move stock markets, but the long term consequences of a break from the EU are unknown and unknowable. It is the uncertainty that of course fuels the market volatility. If the current rally in the pound and stock markets is to be believed, a "Remain" vote is the most likely outcome. A "Brexit," however, would likely cause a sell-off that is of greater magnitude than any relief rally from "Remain," as it would be unexpected. However, betting in either direction is just that, "a bet," and perhaps best avoided, especially if tax consequences are involved.

Other than the short term impact, what are the consequences? In many ways, the UK is already a fragmented union. Of the 16 teams that made it to the 2nd round of the Euro Cup (football/soccer) 4 are from the British Isles: Ireland, Northern Ireland, England, and Wales. It is probably safe to say that most of their fans are not concerned with the difference between country and sovereign state. The union (sovereign state) and its powers are of interest to the English primarily and polls suggest that it is a fairly evenly split between those who fear EU membership is harmful to British self-determination and those who don't.

Ironically, a "Brexit" vote might just speed up the break-up of the UK, with Scotland, Wales, and maybe even the City of London yearning for an identity within Europe rather than Britain. That would be the opposite of what the Brexit supporters would ultimately want. A classic example of winning the battle but losing the war.

Of course, this is not just about the blue flag with yellow stars vs the Union Jack. It is about economic issues and about immigration. The "Remain" camp may have underestimated the extent to which people will vote against their economic interests over a hot button issue like immigration. We see that sort of thing in our own country too. Free trade, political stability, and free movement of labor leads to economic growth. The problem is that this rising economic tide has not lifted all boats in recent years in the UK, EU, or US for that matter. As such, it is hard to convince people who frame Brexit in terms of curbing immigration, that they would be the worse off for it.

Brexit or no Brexit, Europe has problems that will be with us long after the relief rally has faded or the market correction has reversed. Slow growth, an aging population, and a disconnect between political elites and the people will continue to plague the continent. That doesn't necessarily mean that it is a bad place to invest. Stocks are cheap, interest rates are near zero, and any progress on making European businesses more competitive will be a catalyst to unlock some of the depressed asset prices that are pervasive across the continent today.

I will be watching the results of the referendum closely and recommend investors take a page out of the old English playbook: Stay Calm and Carry On!

posted in jps articles on june 23, 2016.