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Historic Day for Britain - Brexit and its implications

edited from an email by Kregg Rooze, Creative Financial Designs


"Contrary to what most experts predicted, Britain's population has spoken (well...voted) to leave the European Union.  This was a vote that many in the UK did as a result to get back their independence, specific to immigration, trade, rights, and overall not having to always follow what the European Union votes to do.  The UK financial cost is yet to be seen and it will perhaps be pretty ugly for their country for the next two to three or more years it might take to unwind.  This will be interesting looking from the outside in to see how it's all handled by all members. What does this mean for Europe?  The footing wasn't overly solid (perhaps a vast understatement) in the first place with the FTSE & MSCI Europe still off nearly 20% of its all-time highs.  Issues on immigration, safety, country debt loads, differences in ideology, etc. all lead the charge.  This was a big vote that will unravel decades of work.  Is it over?  Not likely.  First, only time will tell whether it actually happens or if there is an olive branch to make changes to save the UK in the Union.  Second and of great importance, perhaps many more countries will be looking in the mirror and looking out the window to see how this unravels.  Will we see other strong European nations make a break also?  Whispers of France and Italy are already being heard. So what does this mean to the financial markets, especially to our investors?  Well, we know the main cause of market volatility -- and that is the fear of the unknown.  We definitely have that right now and we fully expect the markets to give way and eventually retake and probably give way several more times now during the summer and perhaps into the fall and winter.  What looked like a low volatility summer just became a volatile, single day news leading market.  In other words, the European headline of the day will likely determine the route of the market for some time.  No doubt about it, this will have immediate impact on the U.S. markets.  The global markets are too tied together for it not to.  However, this doesn't necessarily mean complete failure to our markets.  It does likely mean immediate pull backs for the short-term before the unknowns are dealt with and considered and the markets return to a more stable condition. Specific things to consider:

  • The Britain vote was significant, as they see it as a vote for their continued or renewed independence. 
  • This vote will spook the world financial markets in the short-term.  However, most investing is not meant for the short-term.  The UK represents nearly 4% of the world GDP (ranked number 5 behind the United States, China, Japan, and Germany).  Four percent isn't that significant of a number, but the European Union combined is nearly that of the U.S. so if dominoes start to fall, more significant changes will likely occur.
  • This will not be resolved overnight.  Likely negotiations will occur (although I'm reading most say "the vote is the vote" and it has been decided, but I doubt that personally).  The Britain exit will likely take 2, 3 or more years to unwind.  Since we haven't seen it, we really don't know.  More unknown.
  • This gives other opposition parties in all European countries a new life in their respective political campaigns.  Meaning, we're likely to hear from more opposition parties upon future votes in other European countries.  This will bring more volatility in the future during elections.
  • Creative Financial Design's managed portfolios (one of the third party money managers utilized by Faith Investment Services) have been on the conservative side of our risk measures for some time.  We will not be increasing risk in the short-term and you'll likely see subtle additional measures to reduce risk.  Our international investing has been less than the Ibbotson recommendations for several years now.  This will continue.
  • We (CFD) do have other portfolio options for clients overly concerned about long-term financial market effects."