Given a question posted by a client on Brexit, we are posting a brief comment one the UK vote to leave the EU. Here are our two main points:
It’s a vote against free trade. We find this worrisome for most economies and markets. We connect the vote to leave the EU with the popularity of Donald Trump and Bernie Sanders. There is a sentiment that free trade favors the rich but doesn’t work for the lower and middle classes. We think free trade is good overall (that is on average), but there are those who are displaced and do suffer. Free trade doesn’t benefit everyone, it benefits the majority. Those who suffer may feel great pain while the many who benefit, do so to a lesser degree. Given the lack of real growth in median income we understand voter angst and the desire to place blame. Our point is to look at this not only as a British or EU issue but as a global one. We worry that Brexit portends successful attacks on free trade from within the U.S. as well.
Brexit is not cataclysmic. It’s going to take years for this to play out. Article 50 of the Treaty of Lisbon contains the rules for exit of the EU. Here’s a link to an article that introduces some of the issues. Much of what exists in terms of laws and trade will be renegotiated. There will be trade. The vote may be a reflection of frustration voters feels towards Brussels similar to that many Americans (and American politicians) voice about Washington. I suspect that the future treaties between Britain and the EU will be similar to what was removed. The political calculus from Brussels may be that they need to inflict pain on Britain to discourage other exits.
This comment is useful for understanding how we think about markets and economies. It is not meant to be trade or investment advice.