Weekly Access

Brexit Breakdown


By Michael McKeown, CFA, CPA - Chief Investment Officer

After four decades as a member, on Thursday, voters in the U.K. voted to leave the European Union.  It was a close vote, 52% for “Leave” to 48% for "Stay."  This means that the long-standing trade and immigration agreements that covers 28 countries will no longer apply to Great Britain after its official exit.  The majority of citizens clearly felt that EU membership was inhibiting growth and prosperity.

Currencies and stock markets fell around the globe on Friday as votes were tallied the previous night.  Europe was obviously hit the hardest by sellers as the uncertainty about other countries potentially leaving the bloc and the economic outlook gets murkier.

The demographic split among the vote is getting attention as the ‘older’ generation voted to leave and ‘younger’ voted to stay in the EU. But the London-based Financial Times went further and explained:

“As the votes were counted on Thursday night and Friday morning, the piles of ballot papers told their own story about those parts of Britain that felt comfortable in a modern, connected world, and those which felt cut off from the fruits of globalisation.

Voters in London and Scotland, the two most prosperous parts of the UK, turned out in large numbers to deliver a clear message that they wanted to remain in the EU and its huge single market.

But elsewhere — in the old industrial centres of the north, the small towns of the Midlands and the faded seaside resorts — the ballot papers were stacked high in favour of Leave, rejection of an establishment that had let them down.”

Politics… well, we won’t touch that here, but suffice it to say the environment could be better and it is a sign that populists' leanings across other countries have momentum.  This is a headline risk to the economy and markets, but it does not always mean there will be fundamental changes to either.


“This will end badly.”

This is pretty much the phrase at least one person says concerning any headline risk in the financial world right now… low interest rates, the U.S. dollar, China, the Middle East, venture-backed technology companies being overvalued, oil prices… Brexit.

But what if it doesn’t?

Exhibit A – Japan.

Yes, the country has negative interest rates, its society is very old with poor demographic trends, and its stock market has shown signs of life but is no higher than where it was in 1989.  But by and large – the standard of living improved incredibly over the last couple of decades and its nominal growth was positive on average.

In the U.S., the unemployment rate is low.  Inflation is also low.  Growth is lower than in the past, but it is still positive and at the same trend of the last few years. Still, the stock market is near all-time highs and bond investors enjoyed great returns the last couple of years. 

Everyone in Cleveland is seeing things a little rosier today thanks to the Cavaliers winning an NBA championship (though in my defense, I began drafting this note two weeks ago).

There is always an event in the financial news merry-go-round to bring out the pessimists.  Nonetheless, the term “Secular Stagnation” is being thrown around by ‘top’ economists to describe the disappointing output level, implying it is simply fate that we are at a permanently lower plateau.  Perhaps it is an inopportune time to have a pro-cyclical view but being an optimist paid off over the very long term – for the lowly economists and investors alike.

In terms of portfolios, we came into the Brexit vote tactically underweight international equities, meaning the allocation was below the long-term strategic target.  Morgan Stanley Research believes there is approximately 15-20% downside risk to European equities, which we would view as an opportunity to buy international stocks and rebalance to equalweight or back to the strategic targets.


This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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