Brexit: The beginning of a long process. How will investors react?

 

Brexit brings near-term pain, and what lies ahead will be heavily dependent on how key issues develop from here. This is clearly a negative development but we do not see this as an economic or financial crisis.

This is just the beginning of what will be a long process. It will be some time – likely as long as three or more years - before the U.K. actually leaves the Union, and it will also be a long time before concern over the European Union’s long-term solidarity fades from the investment landscape.

From an economic perspective, we note that the direct global repercussions may not be terribly significant (life will go on) but this is a negative development for a global economy that is already growing at a weak pace. Momentum has been, and remains, critical to the ongoing global recovery given that monetary and fiscal policies around the world are essentially exhausted.

British Prime Minster Cameron has announced that he will step-down in October. He has also stated that he would like his predecessor to negotiate the U.K.’s exit. This likely means that the U.K. will not officially file to leave the Union under Article 50 of the Treaty of Lisbon until after this date. Upon this filing the treaty calls for a 2-year period of negotiation, but the timing can be extended with agreement of all parties.

Aside from near-term market turmoil, the longer-term negatives for global economic growth could come from the risk that voices raise in other EU member countries for an exit. While the primary drivers in the U.K. may have been immigration and a loss of domestic control over regulatory and other sovereignty issues, elsewhere in the region, countries such as Italy, Spain, Portugal and Greece, amongst others, could see growing voices to leave as a result of austerity pressures and the economic pressures a strong Euro currency has placed on many of these countries.