This week we are all going to hear more about the vote regarding Britain exiting the European Union. The polls indicated Monday morning that Britain will not exit and markets seem to be moving higher. While the vote is really about immigration, it also has financial and economic consequences so we wanted to drop you a note to share our perspective.
The key issue causing the vote is immigration. The chart below shows that the tradeoff seems to be between what’s good for the economy and what’s good for immigration.
Europeans are moving to the United Kingdom because the country has a better job market. When compared to the rest of Europe, the U.K. has less regulation around employment and fewer employee protection laws (it’s a more capitalist and less socialist job market). It should be no surprise that the U.K. creates more jobs and Europeans who are willing to move are in turn relocating to the U.K.
Investment markets hate uncertainty in the short term and Britain exiting the EU creates uncertainty. We are not sure how other countries will react, how trade between Britain and continental Europe will change or how global currency markets will be affected. Therefore, a vote to exit the EU will most likely be viewed as a negative decision by the financial markets.
We think that in the end Britain will not vote to leave and the polls are trending that way. If Britain does vote to leave, there will be very little long-term impact to the U.S.
Brexit is just the new global worry. In the long term this will go down as one of the many global issues that caused short-term uncertainty in financial markets and then faded away. We are hopeful that Britain votes to stay because we do believe that exiting would slow down what will likely be a very sluggish recovery in Europe.
Bottom Line: Brexit isn’t an issue worth worrying about for U.S. investors. We simply view this as just more noise. It gives us something to talk about, but isn’t likely to affect long-term returns.E-Newsletter, Market Update