Acumen Market Insights: Markets React to Brexit vote to Exit European Union
June 24, 2016
Written by Reese Veltenaar, CFP®, M.Acc., CTFA Partner
Many Americans will be waking up this morning to the barrage of news coverage surrounding the large pullback in markets as the results of the vote for the British exit from the European Union (EU). The vote is in favor of leaving the Union. Reuters reported 51.8% in favor of leaving vs. 48.2% for staying in the EU.
The Dow Jones was up 1.34% yesterday after the first results of the vote came in favor of staying in the EU (Source: Yahoo Finance). Equity markets around the world are tumbling this morning while bonds and gold are rallying. Here is what you need to know:
The Background:
- The European Union has been “under construction” for some time and is a series of treaties and agreements aimed at creating a more unified group of countries and a more formidable trade “superpower.”
- The UK has resisted many of the acts to unify Europe. It did, however, reluctantly participate in the Maastricht Treaty on European Unity in 1993 after the UK received an opt-out on monetary union. Important to note is the UK never integrated its currency into the Euro.
- The primary reasons given for pro-exit of the EU were:
- Economic governance: UK does not want mandatory participation in other countries “bail outs.”
- Competitiveness: Reducing excessive regulation from the combined market under the EU.
- Immigration: More control over immigration and benefits to migrant workers. This was the political “hot button.”
- Sovereignty: Slowing down the pace of further political integration.
The Impact:
- The true impact of this vote is unknown and this unknown is what is creating uncertainty in the markets. Markets dislike uncertainty.
- The vote is advisory in nature and not legally binding. So, although the vote is completed, the exit is not.
- The vote for exit was somewhat of a surprise. S&P futures were down more than 5% at 1:30 a.m. this morning and recently moderated the pull back with S&P Futures down 3.40% at 8:00 a.m. (Source: Bloomberg)
- The European markets at one time faced their worse day since 1987 but have moderated their losses.
- The British currency (sterling) was down more than 10% hitting a 31-year low as markets fear the impact of this vote on the world’s fifth largest economy (Source: Bloomberg).
- The pullback in markets stems from the precedent it sets regarding:
- What other countries could do if they want to leave the Euro.
- The impact this vote has on the countless trade treaties developed over the last few decades between countries in the European Union.
Steps Acumen is Taking:
- Clients in Acumen models have been underweight in international securities relative to many of our peers.
- Acumen’s aggregate fixed income portfolio has longer maturities and are higher in quality then the aggregate index. Fixed income frequently does well in times of market volatility reducing the overall impact of market sell offs.
- Acumen’s equity exposure primarily focuses on dividend paying stocks that can be less volatile in nature.
- We are determining if and when the market sell off presents opportunities to buy assets at reduced prices.
We encourage clients to continue to proactively work with our team to monitor their accounts, capitalize on potential opportunities, and evaluate their risk tolerance. We are here to answer any questions you may have.
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