No, it is not a new breakfast menu item. Rather it is a term used to describe the potential for the United Kingdom to leave the European Union—merging the words Britain and exit to get Brexit.
Referendum on the European Union
Britain will hold a referendum vote on June 23rd to either Leave or Remain in the EU. The three main issues for the voters revolve around immigration, the economic costs and benefits of EU membership, and trade agreements. The Leave supporters argue that an independent Britain will be better able to control its borders, set stricter immigration policy, and thus stem the flow of immigrants. They also assert that the cost of EU membership—Britain contributes over £19B ($27B) to the EU each year—outweighs the benefits and that an independent Britain can forge its own international trade deals on favorable terms. The Remain supporters point to the economic benefits of the 28-country EU bloc such as free movement of goods and people between borders. They view immigration positively and contend that Britain will lose political and financial clout as an independent country outside the EU.
Why do financial markets care about the vote?
Brexit—the possibility of a Leave vote victory—represents uncertainty to the financial markets. Depending on which camp is talking, potential consequences of Leave include further weakness in the British currency, a recession in the UK, and the necessity of negotiating new trade agreements. Other countries within the EU may decide to hold similar referendums.
It’s hard for investors to handicap the outcome of such a referendum vote. As the date approaches, the polling data have shown an increase in the lead for the Leave camp by a few points depending on the individual poll. This has unsettled the financial markets in Europe and, to some extent, in the U.S. this month.
What does it mean for U.S. investors?
The Brexit vote on June 23rd represents a volatility event for U.S. investors, one of several that we have advised our clients to expect this year. The other events include Federal Reserve interest rate policy changes and the U.S. presidential election in November. While direct earnings impact is likely limited for S&P 500 companies, the uncertainty of a Leave vote does create volatility in the global financial markets. Brexit was mentioned by Fed Chairwoman Janet Yellen in her recent press conference as a reason to keep interest rates unchanged.
For the time being, Brexit has continued to bolster the European bond market as the flight into German bunds has caused the 10-year bund to fall below 0% yield for the first time as investors continue to seek shelter. These lower yields have also been felt in the U.S. markets as investors seek to pick up yield while remaining in a safe haven investment.
We continue to have a constructive yet conservative view toward U.S. economic growth prospects, and ultimately feel the noise created by the Brexit uncertainty could create buying opportunities. We are focused on providing solutions to achieve our clients’ unique financial goals as we navigate the various market environments. We are always available to answer any questions you may have about your investments or the market in general. Please feel free to contact a member of the Pennsylvania Trust team at 800-975-4316.
by Jonathan M. Heckscher and Tara R. Hedlund, CFA, CPA
Mr. Heckscher is Senior Vice President and Director of Fixed Income and Institutional Services at Pennsylvania Trust.
Ms. Hedlund is Senior Vice President and serves as Senior Equity Analyst and Portfolio Manager for Pennsylvania Trust.
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