The Post-Brexit World

The Brexit vote produced some very short term volatility, with two strong down days followed by three strong up days – putting us pretty close to where we were before the vote. Here are our takeaways from that experience:

1. A lot of fear was built up around this event, and given the scope of that build up, the shock was not as great as it could have been. It seems people were mentally prepared for a negative vote.

2. The two down days that followed the vote results appear to have been a knee-jerk reaction more than anything more serious. There was probably quite a bit of algorithmic trading which took advantage of fear. When people sell in a panic, that’s when quick money can be made... or lost, depending on which side of the equation you are on.

Panicking didn’t work for anyone after this event, and it’s never the right strategy.

The process following the vote is likely to be long and drawn out and, at the end of the day, it is unlikely there will be much change. Even if the departure eventually goes through in two, or four, or more years, a global crisis doesn’t appear to be in the cards. We don’t think any market-based reactions are likely to reach the scale of the real estate issues and bank failings we saw in 2008.

Brexit is primarily a British concern, and the effect on the entire world is bound to be minimal – irrespective of the many fears swirling around today. One of those fears it that the populist tone which brought about that “leave” vote could reverberate through other countries. As yet, we don’t see this being the case, and the market isn’t indicating it.

The UK Pound fell immediately after the vote, but the Euro’s reaction was quite small. If Brexit was the domino that would start the fall of the European monetary union, we would have seen a much greater, sustained, loss in the Euro.

Record losses in the UK Pound and the uncertainty around how the country will proceed have created volatility in Britain’s domestic markets and currency. When uncertainty arrives in any marketplace, waves ripple. However, it appears that those waves are going to be limited to local shores.

- Greg Stewart, CIO