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Friday, June 24, 2016

Market Reaction to BREXIT

This analyst was not convinced that Brits would vote to leave the EU. We did examine the portfolios we manage for direct exposure to the UK. Our investments are mostly unrelated to England's economy, though many firms do business there it is not a huge volume compared to China or U.S.. The devalued British Pound may actually help some businesses. We don't own banks or insurance firms. Of course the UK is tied to every other nation but that's a given.

Expect the financial markets to show a knee-jerk reaction but investors don't really know what will happen next.  Stock valuations will likely drop 3 to 4% today or in the next few trading days.  But the value of the underlying non-UK assets will not, so there will be bargain prices in some equities.
Civil Ensign, British Virgin Islands, Annapolis Harbour 0090737
The U.S. Elections will go on. Business as usual goes on. Consumers in other nations will feel a shudder but few employers outside of the UK are going to suddenly decide to reduce payroll simply because they are changing their relationship with their largest trading partner.

Ireland will feel some changes. Too early to outline those but some British firms may turn West, considering more trade deals with the U.S. or Eire.

The U.S. economy is the engine that drives the world economy and the North American economy is stronger than it has been in years.  Once consumers and businesses get rolling, like they are now, that momentum carries at least the U.S. forward consistently.  To the Elections. The choice each of us makes at the polling places this fall will make a huge difference. This is important to remember.

Eventually the UK will need to come to terms with Europe. They never did use the Euro currency. There is still a need to let Europeans work in the UK and vice versa. The British pound will drop for now and then recover over time. The UK will end up relating to Europe like Norway, not a member but paying to play the markets all the same.

The renewed focus on trade tariffs with the EU may turn out to be a good thing. Various EU agencies are actually based in London, that gets tricky. Here the situation becomes like the BRAC, the U.S. military base realignment and closure process.  Land owners, builders and office rental people somewhere in Europe will get new business when EU offices in London are shuttered. London will suddenly have new office space available, for a short period.

The EU may get a little rocky for six months or so. No change there, Europe remains unsettled as refugees keep pouring in and certain economies like Italy, Spain and Greece, while recovering, are not exactly rock solid. That was all going to happen with or without the BREXIT vote.

Many people in England are rightly concerned about a huge influx of migrants from Syria. English communities enriched by so many people from former British Crown colonies. People from the West Indies, Egyptians, Pakistanis and others from the Indian subcontinent live and work all over England. Quite a few of these people are citizens of the UK. Not surprisingly they too are worried about the migrant flow and associated costs to EU members. Scotland is already talking about another exit vote, they sell boatloads of whiskey to other Europeans. Like many nations, there is a concern about trade tariffs imposed on non-EU nations.

Conclusion

The changes may not all be good but investors will still need to put their money someplace safe where it will earn dividends and grow. Can't leave it in cash, especially with the currency dropping. Sounds like the U.S. economy will get a huge influx in foreign investments moving out of the UK!

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