Mid-Year Review with Mr. &Mrs. C
After experiencing a strong rebound from the February lows, marketswere surprised by the Britains landmark referendum on European Unionmembership at the end of June. The vote ushered in added uncertainty toan already vulnerable global economy. Our Quarterly Market Report reflects a hypothetical conversation with Mr. and Mrs. C, long-time clients of Hefren-Tillotson. In this mid-year investment review, we discuss Brexit and potential implications for the world markets and economy.
Mr. C: Our review has proven timely this year given the recent Brexit vote in the U.K. and losses it triggered in the market.
HT: It is always enjoyable meeting with you. One of the most meaningful parts of my job is the wonderful relationships builtwith people like you. It is a real joy helping you reach the financial and life goals we have discussed over the years. Thank youfor your ongoing trust and confidence!
Our meeting is indeed timely given the Brexit vote last week and the market volatility that has surrounded it. The world wasclearly caught off-guard by the referendum in the U.K., which essentially asked voters to choose between staying in the EuropeanUnion (E.U.) or leaving it. Polls heading into the vote were close, but most expected the high percentage of undecided voters toswing toward the “Remain” camp when they had to choose, similar to the Scottish Referendum in 2014.
After all, the U.K. hasbeen an integral member of the E.U. for over 43 years, benefiting significantly from direct investment, higher exports, lowerimport prices, and from becoming the regions leading financial center.
Mrs. C: If theybenefitedfrom membership in the E.U. so much, why did they decide to leave?
HT: It is not written in stone that they will leave. The result will simply kick-off a long negotiation process. Arguments made bythe Brexit camp focused on a few issues: immigration control; greater sovereignty and less policy influence from Brusselsbureaucrats; the perceived high cost of E.U. membership versus benefits received; and reestablishing Britain as an independentglobal leader.
Clearly, immigration became a hot topic with the refugee crisis and terrorist attacks in Belgium and France.Furthermore, the U.K. has always been somewhat of a “Euroskeptic”, erring strongly in favor of free-market capitalism andpushing against the centralized control of the E.U. As an example, Britain never participated in the common currency.
In many ways, the vote represents a clear message to the E.U. that structural changes are much needed in the region. It alsorepresents the general dissatisfaction of citizens in many countries around the world with the status quo, including the U.S. Theunsettledness prevalent today arguably stems from difficult issues such as unusually slow economic growth, job insecurity,stagnating real incomes, security concerns, and immigration fears.
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