June 24, 2016
Dear friends and clients,
In a very close vote the citizens of Great Britain voted to formally leave the European Union. Prime Minister David Cameron has resigned and will step down in October after failing to rally support for remaining a part of the EU. Global stock markets are responding negatively and the Euro and Pound are both falling against other currencies. The U. S. stock market responded this morning with a negative opening.
What are the consequences of the vote? There is a real fear that the British vote will be the beginning of the end for the European Union by encouraging other members to leave. This would have negative implications for global trade and further weaken economic growth in both Great Britain and Europe. Markets are being negatively impacted by the uncertainty surrounding the process of leaving the EU. Strategists are also concerned about the impact on the sales and earnings of multinational companies domiciled in the United States and the rest of the world. Many of these companies gained access to European markets through Great Britain and will now be forced to contract separately with Great Britain and the EU. The rising dollar will also impact the earnings of U. S. multinational companies due to currency translation accounting rules.
The worst fears are probably being overstated. Great Britain will more than likely retain preferred trading status with the European Union. It is in the best interest of the EU to negotiate trade agreements without restrictions, penalties, or tariffs so as not to disrupt the fragile economic growth in that region. The strong dollar, stable political and economic environment, and the very low interest rates throughout the Eurozone will encourage capital flows into the United States which will support our capital markets.
What happens next? Prime Minister Cameron will travel to Brussels next week to meet with the other twenty seven member country leaders. They will begin the process of defining the new relationship between the EU and Great Britain politically and economically. His successor will then begin the formal two years of meetings required by law to negotiate Great Britain’s way out of the European Union and to renegotiate trade accords with member countries. European leaders will be focusing on the agreements necessary to regulate future trade between the EU and Great Britain, the access British companies will have to EU markets, and any banking restrictions on banks domiciled in Great Britain. The hope is Great Britain will still have access to the European mainland markets without tariffs or other barriers to trade.
In conclusion, expect continued market volatility. We advise clients to remain invested through these periods of higher than normal uncertainty. We will continue to manage risk in portfolios through the diversification and security selection process. Please contact your wealth advisor with any concerns or questions.
The Wealth Management Group
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Louisville, KY 40202
Phone: (502) 625-1005
11450 N. Meridian Street
Carmel, IN 46032
101 W. Fourth Street
Cincinnati, OH 45202
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