Brexit: it's not just the Brits it affects. What has happened and why?

User Written by Carl Turner on July 01, 2016.

Brexit: it's not just the Brits it affects. What has happened and why?

UK nationals are still reeling from the shock of Brexit and while British politicians scrabble around for a plan to take the country forward after the momentous and unprecedented decision to leave the European Union, the people wait with an underlying feeling of unease to see just how huge the fallout will be.

Of course British nationals will be the most affected by this momentous decision but we live in an interconnected world and the Brexit vote will have global ramifications which will touch every single one of us. The dramatic impact the result has had on markets and the value of the pound already makes that abundantly clear.

For those non-UK nationals seeking to understand what has and is happening, here is the lowdown on Brexit and how it might affect the global economy.

What is Brexit?

On Thursday 23rd June the British people voted in a referendum. They were asked the question ‘Should the United Kingdom remain a member of the European Union?’ and were asked to tick a box marked Remain or Leave. The vote was close but when results were officially announced early on Friday, the Remain camp had won with 52% of the vote. This came as a surprise given that the previous evening Remain looked set to win and steady markets and a strong pound reflected this.

Has the UK now left the EU?

The UK remains a part of the EU until such time as the UK government officially trigger ‘Article 50’ of the Lisbon Treaty, which sets out the blueprint for the exit process. This is unchartered territory – no nation has ever left the European Union up until now. The treaty specifies a two year window for the two sides to thrash out the exit deal and until negotiations are concluded the UK remains a part of the EU and continues to have the responsibilities and obligations that membership entails.

What happens next?

It remains to be seen when, or indeed if, Article 50 will be invoked. Upon his resignation, Prime Minister, David Cameron, placed the responsibility firmly with his successor. The most likely candidate was thought to be Boris Johnson, but he stepped out of the running in a surprise move yesterday leaving five Conservative MPs to fight it out in a leadership battle unlikely to be resolved until October. Commentators are predicting that either Michael Gove or Theresa May will take the reins.

In the meantime the UK and Europe are left somewhat in limbo. While the UK drags its heels, EU bureaucrats are keen to get the exit process underway and have made this very clear. This morning the BBC has reported that the EU’s top trade official has stated that it must complete the exit process before negotiating trade terms. From the start there is friction between the two sides.

Once Article 50 is invoked the messy process of a UK/EU divorce can start, and it will be extremely messy. Britain wants to retain many of the economic benefits of free trade with Europe but in order to achieve that it will undoubtedly have to accept some of obligations which it wanted to shed by opting out, most significant of these is the issue of free movement within Europe. Curtailing immigration was a key reason why many Brits voted out in the first place but, ironically, the UK may find it has to accept this as a term of any trade agreement.

The terms of the deal have to be agreed by all 28 member states and experts are predicting that the negotiation process could drag on for years (Canada’s recent trade deal took seven years). Meanwhile the fate of Brits living in other EU countries and EU nationals residing in the UK hangs in the balance.

How has the global economy been affected?

The immediate effect of Brexit has been felt globally in two ways: the plummeting value of the pound and stock markets in turmoil. The pound fell by 7.6% to hit a 30 year low, a seismic shift when you consider that the average daily move in the value of the pound against the dollar since 2012 has been 0.35%! Markets have also been sent into freefall as investors sought to shed stocks in favour of less volatile investment options triggering a record two day loss of $3tn, although there has been a bounce back up over the last couple of days. The FTSE 100 ended yesterday above pre-Brexit levels.

What will happen in the future?

Some are saying that maximum financial disruption has been contained but the fact remains that uncertainty about Europe’s future is going to last for some time yet and markets are likely to remain volatile in the face of that. Currency fluctuations are likely to continue over the coming months as a result of this uncertainty.

International companies which chose to locate in the UK to easily access the EU markets may see profits drop and seek to relocate away from the UK. According to the Financial Times some banks are already making plans to shift operations to other financial hotspots in Europe, particularly Frankfurt, Dublin and Paris. There will inevitably be job losses in the City with a knock-on trickle down effect.

Experts also fear that the restructuring of global investment channels will have a negative effect on the whole of Europe causing a slowdown there which will in turn affect global markets.

Turbulent times lie ahead politically for Europe as far-right nationalist factions in other EU countries, notably Marine Le Pen’s National Front in France, have been bolstered by the result and could rally disaffected voters to also push to leave the EU. Some commentators are predicting that it could be the beginning of the end for the bloc.

In addition, the referendum result has caused friction between the countries which make up the United Kingdom. While Wales and England voted overwhelmingly to leave, voters in Scotland and Northern Ireland, which will share a border with post-Brexit Europe, were firmly in the Remain camp. With Scotland’s First Minister now demanding a second referendum on Scottish independence the break-up of the union is not inconceivable.

To be frank, there have been so many surprises for Britain in the last week it is anyone’s guess how this will all pan out, which is why financial markets are unlikely to calm down in the near future.

What should I do about my investments?

It is important not to over-react. As we have already seen, initial losses have now been largely regained in just a week – if you had panicked and sold stocks over the weekend in the face of tumbling markets you would have missed this week’s upside from the bounce back.

Of course, we haven’t seen the end of volatility, which is an inevitable consequence of uncertainty and will probably set the tone for the months and years of negotiation which must now happen. As ever, I recommend staying focussed on the long term and keeping invested. You can read more advice here.

Carl Turner

Carl Turner

Posted on July 01, 2016 in Investments.