Aaron Schaefer

Jun 24 2016

Brexit’s (British-Exit) Meaning for the Economy and Market

Brexit Meaning to the Economy and Market

On June 23, 2016 citizens of the United Kingdom voted on a referendum to leave the European Union (EU). The result came as a surprise to many economists and market analysts. The uncertainty caused by this vote sent shock waves through financial markets. Global stock markets declined, especially in Europe. Currencies oscillated widely, and the Euro and British pound weakened against the dollar. The pound declined to 50 year lows on the news. The 10-year Treasury rallied as yields fell to multi-year lows. While it is impossible to know the near and long-term impacts this vote will have internationally and at home, we want to identify what we see as some of the short-term effects.

Short Term Impacts:

In the coming days we expect heightened volatility, which is likely because of the uncertainty surrounding the UK’s exit from the EU. Much of this uncertainty is around the process for negotiating and securing EU approval for an exit agreement. As a result of the Brexit vote, there will be increased scrutiny on the solidarity of the remaining EU member nations. It is not yet known whether this will cause “contagion” from other member nations considering leaving the EU as well. The EU may seek to punish the UK for leaving the EU in an attempt to discourage other countries from exiting in the coming years. The dollar has and could continue to strengthen as a result of this turmoil. This would make US exports less attractive to European buyers thus negatively impacting earnings for multinational corporations. Interest rates will likely remain low for longer as the Federal Reserve will likely put off raising rates in the aftermath of the Brexit event. However, we anticipate that any material impacts to the US economy should be limited.

Longer Term Thoughts:

One thing to keep in mind is that the United Kingdom’s (UK) actual exit from the EU will not happen overnight. It will likely take several years for the two parties to negotiate the UK’s withdrawal. Once the exit actually occurs, economic growth in the UK is expected to slow even further as a result of having to re-negotiate trade agreements with dozens of other countries. Because half of UK exports go to EU countries, this may also have a material impact on EU growth.

Despite these current events, we continue to believe a well-diversified portfolio containing both domestic and international stocks as well as large and small companies that is rebalanced regularly provides the best opportunity to achieve superior long-term investment results. We want to remind our customers that uncertainty, and the volatility that inevitably accompanies events like the Brexit is not a reason to abandon this investment strategy. It is our view that short-term disruptions in markets provide investment opportunities and it is our job to take advantage of them on your behalf in an effort to enhance long-term results.

We are always available to talk about your specific investment goals and assess if your current allocation is appropriate to accomplish them. Please contact your account administrator if you wish to set up a time for an account review.

Some trust products and IRA contributions/balances are not a deposit, not FDIC insured by any federal government agency, not guaranteed by the bank and may go down in value.
Aaron Schaefer

About Aaron Schaefer

Aaron Schaefer is Vice President, Trust Investment Officer at Hills Bank’s North Liberty location on Forevergreen Road. He has been at Hills Bank since 2004 and manages the investment area of the Trust and Wealth Management division. Aaron can be reached at aaron_schaefer@hillsbank.com.

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