UK Votes to Leave the European Union

[This article was archived on 7/14/2016.]

woman at computerThe outcome of the referendum in the United Kingdom to leave the European Union came as a surprise primarily because during the past week the polls and betting markets had increasingly signaled the opposite. During that short period, the European markets were up 9%. As it became clear through the early hours of Friday that UK citizens had voted to leave the EU, markets throughout the world moved dramatically. The EAFE and the EuroStoxx 50 were both down 9%, reversing the previous week's gain; S&P® 500 Futures were down 3.5% prior to the open; the 10-year U.S. Treasury note yield had dropped from 1.74% to 1.52% overnight (near a historical low); gold was up 5%; and the U.S. dollar was up 2.5%. As we had recently suggested would be the case, a vote to exit the EU by Great Britain has yielded the expected volatility in markets. Volatility will continue to characterize markets over at least the next three to possibly six months until the long-term economic consequences are sorted out along with any policy and business responses.

Brexit represents a populist revolt against the perceived negative effects of globalization and immigration, both viewed as responsible for job losses, stagnant incomes and loss of national identity. It raises the odds that other member nations will do the same. Such movements are already showing positive support in Italy, Spain, France and some Eastern European members. For Europe, Brexit represents a major defeat for the whole concept of a cohesive economic and political unit able to compete head-to-head with the economies of China, Japan and the United States. It may signal the eventual break-up of the union, which most will view as a negative for European, and therefore, global growth.

At this time, it is hard to make many definitive statements about what impact Brexit will have on future global economic growth. It is important to note that the actual exit from the EU is likely to take 2–4 years because of EU rules. In the meantime, Great Britain will remain a member and will be bound by most EU rules. This will delay immediate drastic changes in the current economic relationships between the EU and the UK but, at the same time, protract the period of uncertainty and, thus, the potential duration of market volatility.

The transmission vehicle for both market volatility and economic implications as the result of Brexit will be the U.S. dollar, which had already strengthened by 2.5% within hours of the announcement. A stronger U.S. dollar, especially a sustained increase, will reignite concerns about excessive debt in developing economies, especially China and southeast Asia. It will also hurt U.S. exports as U.S. goods become more expensive throughout the world. In addition, it will push long-term U.S. government bond yields down even further, undermining the Federal Reserve's intention to raise short-term policy rates. Furthermore, the narrower the gap between short-term and long-term interest rates, the less incentive for businesses to borrow and invest and the more difficult for banks to improve profitability.

These examples demonstrate just a few of the possible effects of Brexit. They also make clear that making short-term investment decisions based on multiple macroeconomic and geopolitical variables interacting in complex ways is a loser's game. Mutual of America does not get caught up in trend investing by reacting to short-term events or market volatility, and the Brexit vote is no exception. Our long-standing, prudent and conservative management policies, consistently implemented over the years, have served our clients well. Our investment process is based on the conviction that well-diversified portfolios, both in terms of asset allocation as well as sector, industry and risk factors within each allocation class, over a long-term time horizon and constructed on the basis of superior security selection supported by in-depth fundamental research, is the most viable strategy for preserving and growing asset value. We remain committed to this approach as we continue to serve the pension and retirement needs of our customers as they plan for a financially secure future.

The views expressed in this article are subject to change at any time based on market and other conditions and should not be construed as a recommendation. This article contains forward-looking statements, which speak only as of the date they were made and involve risks and uncertainties that could cause actual results to differ materially from those expressed herein. Readers are cautioned not to rely on our forward-looking statements.

line separator

My Account | Hotline Plus | Careers | Site Map | Help | Text Version | Mutual of America Mobile
Home | Group Products | Individual Products | Interest Account & Investment Options | Your Retirement Center | About Us | Contact Us