Thursday, June 23, 2016, at the market close everyone felt safe. The Brexit vote had been completed and everyone was looking forward to the weekend after one more piece of the wall of worry was removed. As we all know, people generally vote for what is in their own self-interest. For a citizen of the United Kingdom it was obvious with 40 years of peaceful growth, a rise in the standard of living, and the ability for freedom of movement amongst countries for work and living (it is better to retire in the sun of Spain than experience a cold, rainy summer in the UK).
Contentment from people that either never experienced or had forgotten the hardships in the United Kingdom in the 1950’s, 60’s, and 70’s resulted in a group of people voting against their self-interest.
What was to be a great summer weekend instead became a volatile financial mess. The pound fell over 10%, European markets by over 10%, and a general gloom fell over the globe.
Then people realized that it is not binding; Parliament has to approve the vote. While European leaders showed their anger at Great Britain, cooler heads surfaced. The Spanish who went to the polls over the weekend went with the status quo. They have seen the consequences of a severe recession; their unemployment rate, while at a 4-year low, is still over 20%.
Analysts sat back and asked, “If there is a recession in Great Britain how will it affect China, Japan, India, the United States, and Latin America?” And the answer is: very little.
How many fewer cups of coffee will Starbucks sell in the United Kingdom over the next year? Maybe 5% or less. And if it is 5% less, what impact would that have on Starbucks total sales? It is not very much, probably less than five-tenths of one percent. Growth in China, India, and Brazil could make up for that very quickly. In fact, emerging markets were down less than half of what the European markets were down. MSCI Europe two-day return for June 24 and June 27 was –13.41% and MSCI Emerging Market two-day return for June 24 and June 27 was –4.75%.
The event will cause global volatility over the summer, and then over the next few years our estimate is that eventually both the United Kingdom and Europe will do what is best for their own long-term self-interests, which are generally tied to one’s own long-term economic interests.