Last Thursday's vote by U.K. citizens to leave the EU has created days of market turmoil, and while it is possible that the vote will impact the U.K. and European economies, the global implications will be years in the making. Almost immediately, backlash erupted against the vote with a new petition, with over 3 million signatures, demanding another vote by the end of last weekend.
The EU, a union of 28 countries, will still include 4 of the world's seven largest developed economies. The referendum itself is not binding, and exit negotiations are expected to drag out 2+ years. There is a strong possibility that Scotland, who was not happy with the vote to leave the EU, will seek independence again.
Currently, the EU receives half of all U.K. exports, and upon departure from the EU, the U.K. will lose its automatic right to the favorable trade terms currently available as an EU member. In addition to trade issues, concerns over future foreign investment in the UK and the impact to London as a worldwide financial hub have reverberated through the markets.
The vote to leave the EU appears to be driven by lingering anxiety from the Great Recession, rebellion against the existing political powers, and a rise of nationalism, all issues which are keenly felt in other countries, including the U.S.
While it is easy to react to the market turmoil created by the passage of the referendum, it is important to remember this is a political event and the financial impact may be much more of a snooze for U.S. investors than the markets are indicating. In the short term, U.S. stocks remain more insulated from the turmoil, and the sell-off has created some enticing values abroad. Prior to yesterday’s market close, the Euro Stoxx 50 Index was fetching 13x 2016 earning as compared to a PE ratio of 17 for the S&P 500, with a dividend yield on the Stoxx averaging 4% - almost double the yield on the S&P 500. This compares to a recent yield of 1.56% on the 10 year U.S. treasury. In our view, this is ample incentive to be patient and remain focused on the long-term.