Markets would likely react badly if Britons voted to leave the EU. The situation would create serious uncertainty about the future of the EU, and markets hate uncertainty. We don’t know exactly how a Brexit would play out; many legal agreements would have to be renegotiated, work situations for EU and British citizens would be left in limbo, and the political climate would drastically change. However, these consequences would play out over several years as both sides negotiate the exit.
Estimates on the cost of a Brexit vary; one worst-case scenario projects a 6.2% loss of economic growth in Britain by 2030. Another estimate projects a best-case scenario of a 1.6% increase in Gross Domestic Product. It’s very difficult to predict the relative benefits and costs because so much depends on exit negotiations. However, since Britain and Europe need each other, it’s likely that post-Brexit negotiations would be favorable to free trade, making the worst-case scenario unlikely.
Many of the worst-case fears regarding a Brexit are similar to those we faced in 2015 with the “Grexit” or Greek exit. The departure of an important member nation could fracture the EU and cause other countries to consider following suit.
Though it seems unlikely that a Brexit would seriously harm U.S. interests, Federal Reserve Chair Janet Yellen stated that the Fed would consider the potential impact of a Brexit when setting interest rate policy this month. Most experts don’t expect the Fed to raise rates this week, though there’s always room for a surprise.
Is a Brexit the black swan event that could throw a wrench into markets? It’s certainly possible, but it’s not the most likely scenario. Though a British exit would certainly affect global markets, it’s important to keep things in perspective. Headwinds and threats come in all shapes and sizes, and it’s important to take them in stride. Some headwinds blow in for a while and then go away; others linger and cause more significant volatility. Being a long-term investor means staying flexible and maintaining focus on your individual goals. If you have any questions about how Britain’s vote may affect your portfolio, please give us a call.