Brexit: Our Thoughts On The Headlines
Posted by Team HFM on June 30, 2016
The U.K.’s Brexit vote certainly surprised the markets and created volatility which was quite pronounced for several trading sessions, but markets have since returned to more normal trading patterns. However, it’s important to understand that the volatility may well continue for some time to come, as it could take more than two years for Britain to disengage from the European Union. As they say in England, “keep calm and carry on” and it is worth noting that Britain was not a member of the Euro currency and as such had never made a full commitment to being a member of the Eurozone. The U.K. economy will suffer some due to the Brexit vote, with an increase in unemployment and slowdown in consumer spending, not to mention a reduction in foreign direct investment. S&P downgraded U.K. sovereign debt from “AAA” to “AA.” One of the biggest questions is the longer term confidence in the United Kingdom by its members, as both Northern Ireland and Scotland voted to remain in the E.U. and Scotland is thinking of having another referendum on being a member of the U.K. In addition there is an increased risk that some of the other 27 countries may act to leave the E.U., although the vote over the weekend in Spain did not suggest that they would be next.
Fundamentally, we do not think that Brexit will have a major effect on the U.S. economy and U.S. corporate earnings. Although we are and have been positive on equities, with a slowly growing economy and moderately high stock valuations, this news could create the impetus for a short term pull-back in stocks. Longer term, we would view this weakness, if it develops, as an opportunity to be a buyer of quality U.S. stocks.
The bond market has reacted dramatically with the 10 Year Treasury yield falling from 1.72% to 1.44%. We think the Fed will likely hold off on any rate hikes this year, which should be positive for equities. At the most, we think that there could be one rate hike in 2016, but that may well be put into 2017.