Macro

Brexit: Market Implications Following a Surprise Vote

June 24th, 2016 | By Brendan M. White, CFA

In a referendum held Thursday, June 23, voters decided the UK should leave the European Union.  This outcome, otherwise known as "Brexit," will have a significant impact on the UK economy and will send ripple effects through the global economy.    

Fort Washington’s initial view on the outcome is outlined below:

  • The outcome of the vote was certainly a surprise as is the magnitude of the initial reaction of the market.
  • This will likely cause an economic shock in the UK, slightly less so in the EU and less so elsewhere.
  • Ripple effects of questions over the membership status of other EU nations are a significant concern.
  • Rough estimates shave ~2% off UK GDP (resulting in a recession in the UK), ~0.5% off EU GDP and ~0.1% off U.S. and global GDP.
  • Increased fiscal and monetary stimulus is to be expected, including accelerated quantitative easing (QE) in Europe.
    • EU trend growth is still achievable.
  • A variety of factors add additional risk:
    • Populist tone makes it a tough time to negotiate free trade.
    • Economic growth has been chronically slow.
    • Central banks have less ammunition and the effectiveness of policies is questionable.
  • In the U.S., the Fed is likely on hold for a rate increase, perhaps until December. The path to higher rates over the long-term will be flatter.
  • We believe the impact on U.S. earnings to be a 2-3% drag with limited opportunity for multiple expansion in the near-term.
  • U.S. rates are likely to remain well bid.
  • There could be select opportunities to add risk, but full valuations in risky assets suggest patience. Some strategists project both EU and U.S. stocks are halfway to their Brexit target.

As more information comes to light on this historic vote, Fort Washington will keep you up to date with viewpoints and perspective. 


The views and opinions expressed in this commentary reflect subjective judgments of the author based on current market conditions at the time of writing and are subject to change without notice. Unexpected events may occur, there can be no assurance that developments will transpire as forecast. This publication has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product.