To Argent Clients and Partners:
Financial markets around the world are reacting to news from Europe last night. Our investment team continues to closely monitor the situation. We want to provide you with some background and information to help put this matter in the proper context.
Great Britain (UK), in a non-binding referendum on Thursday, voted to exit the European Union (EU). The outcome of the vote (referred to as “Brexit”) likely will start a process of negotiations between the UK and EU leadership in Brussels for future rules of trade and other matters that are currently governed under the terms of EU membership. It is important to note that negotiations last for two years and existing EU laws still apply during the waiting period. The earliest the UK could be free of the EU is 2018. However, the British Parliament still must take the steps to formally initiate the exit (by invoking Article 50 of the Lisbon Treaty). It is important to remember that this referendum, while historic and important, marks only the beginning of an uncertain process.
We do not think that Brexit will be a 2008 Lehman-like disaster. However, we do believe that Brexit is overall negative for both the UK and the EU economically. Going from free trade with continental Europe to an environment that may or may not be free trade is not constructive. Erecting trade barriers is dangerous and the market reactions today indicate fear of how significant these barriers may become. Clearly, a British exit from the EU would be economically harmful in the long term. Any short term harm most likely will be the result of abrupt price changes (e.g. currency exchange rates). There is risk that the Brexit vote motivates other EU nationalist movements to increase efforts for similar actions. The possibility of an eventual disintegration of the EU may be what most concerns financial markets. However, nothing concrete has transpired and it will take years of negotiation before any changes are final.
Looking ahead, the liquid nature of financial markets and the effects of emotional decisions in the short term will likely lead to overreaction and some distinct investment opportunities. Billions of people in emerging market economies are still working hard to improve their standard of living and want to buy more of what western economies produce – which continues to bode well for economic activity. EU and other western currencies remain under pressure and the economic activity stimulated by weakened currency is often a driver of economic recoveries. While this vote increases uncertainly in the region, European equities appear to be very attractively priced.
The Argent Investment team will have further commentary in our quarterly investment piece that will be released next week. In the meantime, if you have any questions or concerns please reach out directly to your Argent relationship manager or any member of our investment team.