Our Thoughts on Brexit

Last night, Britain voted to leave the European Union by a narrow margin. Global stock markets tumbled as the result surprised many investors.  We were not surprised by the exit, but were surprised by the strong market reaction.  The markets had not priced in this outcome, though the event had been well broadcasted for months.  What should we do now?  We have two thoughts:

(1)    Stay away from Europe. Investors face many uncertainties in Europe as nothing like this has happened before in the EU’s 59 year history. Other EU members may follow suit and call their own referendums. Trading deals between Britain and the rest of Europe will have to be renegotiated over the next two years.  The fates of foreigners living in the UK and British expats living in the other EU countries need to be determined.  Many economists predict negative economic growth in the UK after Brexit. Given all these uncertainties, investors should be cautious with European equities and currencies.

(2)    Minimal impact on US stocks. About 50% of the sales among S&P 500 companies come from foreign countries, but only 1% come from the UK. Even if the UK goes back into a recession, US companies won’t lose much revenue as a result (see our post).  Global uncertainties may postpone the Fed’s rate hikes even further.  Despite the short-term market volatility, the Brexit should have marginal impact on US stocks over the long run.
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