ZRC Wealth Management’s view of the UK’s decision to exit the European Union

  • The UK vote to leave the European Union (EU) sets in motion a long period of political, economic and market uncertainty for the UK (the world’s fifth-largest economy) and EU.
  • Extreme market volatility is rarely a good time to make drastic moves with your portfolio. We see selloffs in global stocks creating buying opportunities. Foreign equities remain attractively priced, especially when compared to their U.S. rivals, and the outlook for most sectors still positive.
  • The vote does not change how ZRC manages client investment portfolios. Given that it will likely take several years for the specifics to play out, we believe the best protection is ZRC’s time-tested approach that emphasizes diligence, discipline, and broad diversification.

The UK’s momentous decision to leave the EU brings long-last political and economic consequences. We expect European leaders to focus on fending off domestic populist movements emboldened by the British exit and on preventing the EU from falling apart.
This vote will have a significant global economic impact. But because the referendum result itself is not a binding decision, it will take considerable time before that impact is fully felt. In the interim, uncertainty will persist. First, the result needs to be incorporated into an Act of Parliament in the United Kingdom. Under the terms of the Lisbon Treaty (part of the E.U.’s governing framework), the United Kingdom will then give formal notice to the E.U. After that, negotiations will begin on the actual exit terms. Those negotiations can span two years and may be extended further.
The most immediate ramification will be continued uncertainty and political change in the United Kingdom. David Cameron has announced he will resign as UK prime minister by October, setting the stage for a Conservative leadership election this summer. This race will likely be dominated by Leave supporters, increasing uncertainty and the risk of contentious exit negotiations.
UK’s exit from the EU could be messy, drawn out and costly. It involves undoing UK and EU laws, and striking trade deals with a spurned EU. The euro could fall even further – putting further pressure on European economies. As jittery investors try to make sense of these unprecedented events, stocks could trend lower.
Estimates of how Brexit will affect the U.K. economy range widely; some are positive, but the majority are negative. A key assumption in any Brexit scenario is what happens to trade agreements. The E.U. is the United Kingdom’s largest trading partner, receiving about half of all U.K. exports. Upon leaving the E.U., the United Kingdom will lose its automatic right to the favorable trade terms that E.U. membership bestows.
As a client of ZRC Wealth Management, your portfolios are managed to your individual specifications and goals. Including; your risk tolerance and ability to emotionally withstand significant short-term declines in your portfolio, your current and future cash flow needs, and many other variables. Living with the volatility associated with equities is critical for an investor whose goal is to grow their assets and significantly outpace the effects of inflation.
The largest foreign stock investment in just about every ZRC client account is the DFA International Core Equity Fund (ticker DFIEX). In looking at the top ten holdings alone, we see large, diverse, multi-national companies that will continue to profitably operate (and even grow) regardless of the political and economic climate in Europe. Companies such as Nestle (Switzerland), Total (France), BP (UK), Diamler (Germany), Royal Dutch Shell (UK), and Toyota (Japan).*
Given that it may take several years for the specifics to play out, an investors’ best protection is to be clear about their financial needs and goals – and hold a portfolio diversified across asset classes and regions. If you have any questions or concerns (whether you are a client or not), please contact us.
Barry N. Mendelson, CFP | Richard P, Clarke, CPA, PFS | Ryan K. Kosakura, CFA | John L. Davis, CFP