UK ousts itself from EU with ‘Brexit’ vote

July 21, 2016

After months of speculation, debates and political stalemate, voters in the UK, on a slim 4-point margin, have chosen to divorce themselves from membership in the European Union.

The historic vote to leave the EU, however, is merely a compass point for the UK’s future. Uncertainty will rule in the short term, as every aspect of British society looks to secure its newfound footing, not only in the European bloc, but on the global stage as well. The most immediate impact will likely be felt in the financial and political arenas.

The British pound took a beating early Friday morning, falling to levels not seen in 30-years. Some speculate it could depreciate by up to 20 percent against other major currencies. To counteract any negative effects, the Bank of England has already drawn up contingency plans to help bolster confidence. Meanwhile, the UK could lose its AAA credit rating. “We think that a AAA-rating is untenable under the circumstances,” Moritz Kraemer, chief ratings officer for the S&P credit rating agency, told the Financial Times.

International markets were jittery too, with the global sharemarket, as measured by MSCI, down -4.2% for the day, with Japan’s Nikkei off -7.9% and the US S&P500 down -3.6%.

The New Zealand market held up relatively well compared to our global counterparts, with the NZX 50 down -2.3%. New Zealand Government Bonds benefited as a safe haven, returning +0.9%.

To further compound uncertainty, shortly after announcing the referendum’s final tally, David Cameron said he would step down from his post as Prime Minister in October, noting that “fresh leadership is needed.” Cameron said he would attempt to “steady the ship” until that time and see that “the will of the British people,” as voiced by the Leave vote, was carried through.

The UK’s exit from the EU is of course unprecedented; the British government will be the first to undertake the decoupling process under the terms outlined in a yet unused provision of the bloc’s governing treaty known as Article 50. Under Article 50, Britain and EU leaders would deal with issues from trade tariffs and migration to a myriad of regulations.

Article 50 also comes with a time clock: a two-year deadline for hammering out a negotiated departure. But what that negotiation looks like, no one knows, since it has never been invoked. That time clock doesn’t even start until Cameron officially declares Article 50 is in effect. There is some advantage to delay: Britain could begin informal negotiations with the EU around a new trade deal while still officially a part of the bloc. The process however, is set against the Brits. The Economist describes it like this:

“[Article 50] also specifies that, when agreeing a new deal, the EU acts without the involvement of the country that is leaving. To get a feel for the negotiating dynamic, imagine a divorce demanded unilaterally by one partner, the terms of which are fixed unilaterally by the other. It is a process that is likely to be neither harmonious nor quick—nor to yield a result that is favourable to Britain.”

Longer-term effects remain uncertain, however Mercer is monitoring developments and will keep you informed as more information comes to light.

As with any market development (positive or negative), our Portfolio Management experts monitor the situation and will modify the portfolios if and when necessary. Remember that markets will always experience rough patches of volatility, which is part and parcel of seeking longer-term investment growth.

Investors in the Mercer Super Trust, Mercer KiwiSaver scheme and Mercer FlexiSaver should not make ‘knee jerk’ reactions to these developments in ways that might be detrimental to their longer-term strategic objectives. Mercer’s portfolios are well diversified and are designed to withstand volatility over the longer term.

Mercer View on British Exit From Europe

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