Fans of Game of Thrones have become so accustomed to seeing the characters they want to win die and the ones they don’t live, that in the final two episodes of this past season (spoiler alert) we were expecting the same kind of disappointment. But that’s not what happened – fortunately.
Likewise, global investors were expecting the U.K. referendum on European Union membership to side with the “remain” camp. But that’s not what happened either – unfortunately.
In the days leading up to the vote, the British pound rallied, global sovereign bond yields rose, global stocks moved higher and the recent strength in gold began to dwindle. All of these different financial markets were telling you a “remain” outcome was imminent and markets were priced accordingly.
The market had good reason to expect this. Most of the polls gave the edge to EU membership, there was a fairly large undecided camp, which tends to gravitate towards the status quo (EU membership in this case) and historically votes for more independence just don’t come to fruition. Just ask anyone from Quebec or Scotland.
So when the U.K. voted to exit the EU, or Brexit, as it has become known in the media, the market was caught offside. A repricing was in order to go back to where we were before the market got ahead of itself.
In the days following the result we saw that repricing occur. The pound had its worst day since the early 1970s, gold rallied and stocks globally sold off on heavy volume. But a repricing is not a global rout in the order of 10 to 20 per cent. This is not a “Lehman moment” or credit crisis-like event. It’s not even as worrisome as the Greek debt debacle was (is). It’s a significant issue for the U.K. and Europe, but far less so for those on this side of the pond.
Now that the people have spoken, a long and drawn out negotiation process will begin just as soon as the Prime Minister enacts Article 50 of the Lisbon Treaty. However, the current Prime Minister of the U.K. David Cameron is resigning, so negotiations between Britain and the EU won’t start until we have a new leader at 10 Downing Street. This process could be drawn out as long as two years, so you haven’t read the last of this issue in the news yet.
In the meantime, we will probably see heightened volatility but markets should move along just fine.
Lori Pinkowski is a senior portfolio manager and senior vice-president, Private Client Group, at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Past performance is not necessarily indicative of future performance. Lori can answer any questions at 604-915-LORI or [email protected]. You can also listen to her every Monday morning on CKNW at 8:40 a.m.
