Freaking Out, Brexit Style

Date: June 28, 2016


The first line of the Fortune article read “Decades of European integration were blown up by a single vote”. For the Economist, a “senseless, self-inflicted blow”. The Telegraph deemed it the “greatest disaster to befall the block in its 59-year history”. 

NIKKEI 225 down 7.92%. DAX down 6.82%, CAC 40 down 8.04%, FTSE down 3.15%, S&P 500 down 3.60%. The Great Brexit Freak Out is in full bloom. But why? When I say why, I don’t mean why people think that the Brexit is a major event, because it definitely is. And when I say why, I also don’t mean why are people freaking out–a freak out seems about right in this situation. I just want to know why everyone is freaking out this much.

It will be quite some time before anyone knows the impact of the Brexit and even longer before they feel that impact.  Article 50 of the Lisbon treaty provides the vague guidelines for leaving the EU. The first step is to provide formal notification, and even that probably won’t happen for another four months. After the Brexit vote passed, Prime Minister David Cameron announced his resignation and deferred any action, including notice to the EU, to the new leadership that will take office in October 2016. The UK’s EU treaties will expire two years after the notice is provided or whenever they decide to rescind them, and the EU and the UK can agree to keep the treaties going longer than two years. Despite some tough talk from the EU about moving quickly, when you think about the number of people, the number of things to figure out, and the heavy politics involved, I would bet on an extension beyond two years. So far, seems like my freak out should be of the “mini” variety, since nothing is going to happen for a while.

Once the notice is provided later this year, the UK and EU have to get together to figure out what their new relationship will be, if any. The Brexit vote just means that the EU treaties will no longer define the relationship between the UK and the EU member states, it doesn’t say how the new relationship will be defined. On one end of the spectrum is the “Norwegian option” in which the UK would exit the EU but enter the EEA. In our industry, that means still receiving the benefits of and being subject to both UCITS and the AIFMD. On the other end of the spectrum is the “WTO option” in which the UK would have no new, special trade agreements with the EU. In this case, the UK’s relationship with the EU member states would be the same or similar to its relationship with the US, and it would need to follow the non-EU provisions of UCITS and the AIFMD to maintain sales and marketing in Europe. For the asset management side of things, there are a number of options that will be the same as or incredibly similar to the past. So until I hear something different, no reason for a major freak out here either, certainly not one big enough to drop the market by 8.04% or 6.82% or even 3.15%.

In late 2008 and early 2009, a lot of people sold their investments and put everything in cash. Then they bought back those investments a few years later after the market had recovered, the old sell low and buy high strategy. That just goes to show you that when a freak out is going down, it is always best to know just how much freak out is the right amount of freak out lest you look like a fool in the cold light of day. Did I mention that the UK GDP is under 4% of global GDP?  In the case of the Brexit, it seems like a small amount of freak out goes a long way.

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