Steven Sands - Market Impact

Shock at the outcome of the Brexit’s narrow vote to leave the European Union has triggered unprecedented political and social repercussions, both internally and on the world stage. While the UK untangles itself from economic and political EU regulations, investors untangle the effects of the Brexit vote on the global market, which fell into disarray as the results rolled in on Thursday June 23. The fallout is anticipated and mapped by this June 26 Bloomberg article.

The stock selloff is reminiscent of the aftermath of other disasters–natural, political and economic: “Japan’s March 2011 earthquake, the U.S. debt-ceiling standoff that August and the 2012 euro zone recession triggered by the debt crisis. All three markets declined at least 11 percent.” But as Charles Schwab global investment strategist Jeff Kleintop takes pains to point out, “in each of these instances stocks rebounded to their pre-shock level in three or four months.”

As reported by Bloomberg, Morgan Stanley predicted “Britain’s FTSE 100 Index falling as much as 19 percent and the Euro Stoxx 50 Index dropping up to 14 percent, with financial and consumer discretionary stocks hit hardest and staples and health-care shares outperforming.” Although the FTSE 100 didn’t fall quite that far–and almost immediately began to climb back up–the Wall Street Journal cautions that more attention should be paid to the FTSE 250, as a better indicator of what’s really going on in Britain. Notably, the FTSE 250 has been slower to recover than that FTSE 100.

European equities are expected to suffer. According to Bloomberg, “Yogi Dewan, chief executive officer at Hassium Asset Management, says he’s selling European stocks to buy U.K. equities.” Like Yogi Dewan, investors generally expect the Bank of England to once again engage in quantitative easing, based on remarks by bank governor Mark Carney following Brexit. “’There’s comfort that central banks will underwrite the negotiation period,’ said Robert Michele, chief investor and head of fixed income at J.P. Morgan Asset Management.” Lowering interest rates and buying bonds may help stabilize the market, but may also fuel inflation and further weaken other banks with already low interest rates.

Steven Sands - Brexit Market Impact

“The largest risks in the foreign-exchange markets involve commodity-rich countries and economies reliant on the U.K.” Poland and South Africa are prime examples. As fear continues to work on the global market, “the biggest beneficiaries are likely to be the traditional safe havens, the dollar and the yen.” Other safe bets for investors include government bonds and–of course–gold. “U.S. dollar gains from haven-seekers will push down commodities, cutting companies’ earnings and prompting devaluation of the yuan as fewer exports to Europe, China’s biggest customer.”

However, as noted by “Geoffrey Dennis, head of global emerging-market strategy at UBS Securities:

[…] Asian countries, which have been underperforming emerging-market peers so far this year, may see more inflows as investors flee Europe’s turmoil.” In broader strokes, Victor Szabo of Aberdeen Asset Management Plc foresees emerging markets will soon resume “‘business as usual.’ High-yield debt from developing countries could even benefit from a lower-for-longer interest-rate environment in Europe.”

The Brexit’s immediate and stark effect on the economy and political landscape says much about the element of surprise. Despite polling indicators, neither U.K. nor global citizens expected the vote to go the way it did, and, thus, the impact on the global economy was perhaps harsher than it might have been had the vote not been so close.

The effects of fear are certainly evident in the fallout, as with any unanticipated disaster. With the tumultuous atmosphere both at home and abroad, and the tense negotiations ahead, this may not be the last major shock the market receives this decade or even this year.