On Thursday, British citizens voted in a national referendum on whether or not their country should remain a part of the European Union (E.U.), of which it has been a member since 1973. At stake was Britain’s relationship to a much disliked supranational institution, and what this means for trade, sovereignty, and security. Proponents of a British exit (“Brexit”) voiced populist sentiments focused on preserving a sense of British national identity, as well as securing Britain’s borders in the midst of the E.U.’s refugee crisis. Those in the “remain” camp (which included most business executives and economists) emphasized the benefits of free trade and open labor markets, and cautioned against the unforeseen consequences of an unprecedented defection from the E.U.
It was a long-fought and bitterly contested campaign (just last week, Jo Cox—a British member of Parliament and vocal proponent of the “remain” vote—was murdered in the street by a man with professed nationalist sympathies). In the days leading up to yesterday’s vote, financial markets rallied, ostensibly on news that the “remain” camp was gaining an edge in polls. Instead, the “leave” campaign unexpectedly prevailed, carrying 52% of the vote. British Prime Minister David Cameron, who had proposed the referendum under political pressure and staked out a position strongly in favor of remaining in the E.U., acknowledged the popular defeat and announced his intention to resign by October of this year.
Observers on this side of the pond awoke Friday morning to global financial markets in turmoil. Britain’s currency, the Pound, declined as much as 8% (the worst single-day drop on record, and its lowest point vs. the U.S. Dollar in 30 years). European and Japanese stock indexes declined as much as 7-8%, and U.S. stocks declined more than 3%. Among the few safe havens today were the usual suspects in periods of market turmoil – gold and U.S. Treasuries, both of which rallied modestly.
So what happens next? In the short-term, there are more questions than answers, and this uncertainty will surely lead to continued market volatility. To begin with, the close vote in favor of leaving masks a divergence of voter sentiment within Britain. In both Scotland and Northern Ireland, a significant majority of voters preferred to remain in the E.U., and given the outcome of the referendum, there may be renewed calls for one or both of those countries to formally declare independence from Great Britain (Scotland held such a referendum in 2014, narrowly electing to remain a part of Britain). Moreover, incipient nationalist movements in other E.U. countries may attempt to follow Britain’s lead, further undermining a fragile political cohesion on the continent.
If Brexit does come to fruition (technically, the referendum is non-binding), it will be a complicated, drawn-out process, likely taking several years. Britain’s separation will require a host of revised regulations, treaties, and trade agreements. To be sure, this is an unwelcome distraction for businesses—forced to operate in the limbo of regulatory uncertainty—and a drag on productivity. Companies may defer investments, and the near-term impact on global trade is likely negative.
At the same time, the free enterprise system is extraordinarily adaptive and resilient. It has survived world wars, depressions, recessions, terrorist attacks, and the threat of nuclear war. When the dust settles, we are confident that it can adapt to a shrinking E.U. as well. Meanwhile, experience tells us that periods of market volatility offer some of the best opportunities to buy great companies at attractive valuations. We will continue to diligently search out these bargains, and manage our clients’ portfolios with their long-term objectives in mind.
Those objectives have not changed since Friday morning. There is nothing unusual by historical standards: this is what markets do. So our recommendation remains the same: stay the course.