dreamstime_xs_67142257 - british puzzle piecesIf you woke up on June 24th and were surprised to see Britain voted to leave the European Union, you are not alone. The global capital markets did not anticipate the “Leave” camp would be declared victors either. The market hates surprises and events that are unprecedented. Therefore, on Friday and Monday the global stock market sold off, depending on the region, between 5% and 14%. As I write this on June 28th, the market is regaining some of the decline. The good news is the areas of your portfolio that are supposed to hold up when fear hits, did so. I think it’s fair to say no one knows what Britain relinquishing their membership in the E.U. truly means. However, to try to understand what the future might look like, it’s important to examine history and how Britain got to their historic decision.

The idea of creating the E.U. came after WWII as a war-torn Europe tried to answer the question of how to avoid continually tearing themselves apart. They decided that if European countries were economically and politically aligned they would be less likely to start wars with each other. When one looks at it from this angle, it has been a tremendous success. In fact, the E.U. was awarded the Nobel Peace Prize in 2012. E.U. Membership came with many advantages such as free trade, but also disadvantages, one of which, losing some sovereignty to a higher central governing body.

Flash forward to today. After going through the great recession of 2008, the E.U. (and almost all regions around the world) has had a number of hardships. They have been plagued with recessions, a refugee crisis, bailouts of peripheral countries, high unemployment and terrorism. This has opened the door for European countries to look internally and reassess their own personal affairs. The “Leave” contingent was looking at the cost of being a member of the E.U. and making the case that the costs outweighed the benefits. This is an oversimplification as there were other pillars of the leave campaign, but this was a big one.

I believe Britain, and other countries considering leaving, has fallen into the “what have you done for me lately” mindset. However, Britain has always had one foot in the door and one foot out by deciding to keep their own currency, the Pound, and not adopt the Euro as their currency (which, in retrospect, may make the break up less messy). There will likely be economic and immigration consequences, among others, of Britain leaving the E.U., which could lead to further fracturing of both the U.K. and remaining E.U. I have to imagine Britain and the E.U. will negotiate the terms of the break up to find common beneficial ground.

Since no one knows how this affects things fundamentally, this has been a fear-based sell off in my opinion. We make investment decisions based on data to remove emotions from the equation. Changing investment strategy based on news headlines and market reactions is usually a way to sub-par returns.

If you have any questions, please don’t hesitate to reach out to an investment advisor at The Partners Group.

Statistics sourced from Yahoo Finance and Bloomberg.

Author:
Michael Gallagher, CFA® – Portfolio Manager at The Partners Group
503.941.4324, mgallagher@thepartnersgroup.com

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