What is BREXIT and Why Should We Care?

Virtus Wealth financial advisors > What is BREXIT and Why Should We Care?

by | Jun 28, 2016

On June 23rd, Britain voted to exit (BREXIT) the European Union (EU). It is an important issue because it will impact the global economy, both short-term and long-term.

The EU was first organized in 1951 and developed a monetary union in 2002. The union now includes 28 members with the mission to help facilitate the ease of movement for people, goods and services within the region. I could spend pages writing about the benefits and disadvantages of the EU and Euro. However, to be succinct, I will just state, overall; I believe it is a net benefit to both Europe and the global economy. However, that is far from a consensus opinion. We will table that discussion for another time.

Regardless, due to both economic and social issues in Europe, the EU has fallen under significant pressure over the last several years.  This pressure has led to momentum for the movement to break the EU and/or the Euro: Britain was the first to act. What will that mean to the stock markets now that Britain voted to exit the EU? Short-term it means volatility in many sectors and countries. Longer-term it could significantly impact the European markets, which could have an impact on the global economy. Europe is the largest importer of goods from China. Any material struggle in Europe will impact China. The U.S.A. has grown at a snail pace the last 7 years, and that includes help from global growth.   Can we avoid a negative impact if those regions are not growing?

The most important concern is the banking industry. London is the banking/finance hub of the European nations. Banking and financial services starts and ends in London for the EU. BREXIT will significantly impact the banking industry in Europe. If there is one thing we have learned, the economy of any society is reliant on an efficient monetary flow. If banks aren’t lending, an economy will usually struggle. Short-term, I can’t envision a situation where banking isn’t significantly impacted. Longer-term, at best it is less efficient due to duplication. Just due to the unknown of how all the negotiations will go, which is expected to take two years after the vote, will slow down lending.

Another concern I have is the domino effect. First Britain, then maybe Germany, and then maybe France and who knows where it goes from there. Maybe it leads the global economy into a concern of currency wars.

Although one can argue it is good for Britain long-term, the more global repercussions will be felt short-term. I have no desire to be an alarmist. We will move forward. However, the sailing will get rougher due to BREXIT. Every ripple in the water from Britain’s drop only makes the sailing choppier. The good news/bad news of BREXIT is this process to actually exit will take a couple of years. After some short-term volatility, the markets should stabilize while trying to analyze the impact of the negotiations. Unfortunately, that unknown will likely put a cap on Europe’s growth. I was high on Europe coming into the year due to some solid signs we saw of the recovery finally taking shape. We didn’t foresee BREXIT and are now going to wait to see how this all shakes out before entering that market again. As for the US markets, I expect the same; short-term volatility and then stabilization. The good news is I expect this will delay any interest rate hikes by the fed until the 4th quarter, at best.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized advice.

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