Breaking Down the Brexit and What it Means for Investors

by on Jun 28, 2016 Categories: brexit, retirement planning, economy

The world was shocked last week by the unexpected news that 52% of voters in the UK opted to leave the European Union. While this news sent shock waves through the global investment community and caused markets worldwide to decline, the decision has left common investors with a lot of questions as to what’s really happening and how it’s likely to impact their long-term investments.

 

Before addressing how the Brexit may impact the average investor, it’s important to first understand the basic dynamics of the European Union and UK’s vote to exit.

 

What is the European Union (EU)?

The EU is a 28 (now 27) country partnership that was formed after World War II to strengthen political and economic relations. It has evolved into a union that allows goods and people to move through its member countries similar to the way people move across state lines in the US. In addition to each country’s individual government, the EU has its own parliament and sets regulations on a variety of issues such as the environment and international policy.

 

What is the Brexit and what happens next?

Brexit is a term used to describe the UK leaving the EU. The next step is for Prime Minister Cameron (or his successor) to start the formal withdrawal process, which will take about 2 years from start to finish. The process will include a series of negotiations between the EU and UK over the terms of the exit. Until the UK formally exits, they’ll still follow EU laws but won’t have any input on decisions being made.

 

Why were people for or against leaving the EU?

Those in favor of remaining in the EU argue they get a great benefit from membership – easier trade to other European countries, easy movement across borders, and a positive flow of young immigrants to help fuel economic growth.

 

On the other hand, there is a belief that being a member of the EU is actually hurting Britain and preventing stronger economic growth. Those who favored the exit feel Britain is making a large financial contribution with little return and the EU is imposing overly strict rules on their businesses. Border security seemed to play a large role as well.

 

What does the Brexit mean for the US economy and stock market?

The biggest question that remains is what the Brexit means for businesses, global economies and investors. Despite global stock markets reacting negatively to the Brexit news, the sharp declines are tied more to uncertainty rather than any fundamental business changes. Despite the media hype, multiple experts believe that there could be a nominal impact on the US economy, but the Brexit alone will not cause a recession. Investors who primarily hold investments here in the US should not allow the uncertainty surrounding the Brexit to drive investment decisions – they would be better served to watch individual company valuations and the health of our economy. Investors who will feel the greatest impact are those with holdings in European stocks.