Much to the global financial markets' surprise, voters in the United Kingdom (UK) have elected to leave the European Union (EU) economic block. There are many reasons why UK citizens have decided that this is the best course of action, but ultimately it comes down to a belief that the UK is better off not being tied economically and politically to the rest of Europe. As much as 50% of the UK's trade is with EU member nations, so they will never be able to fully divorce themselves from the rest of Europe, but changes in how commerce is conducted will occur as a result of this vote.
The near-term impact can be summarized in two words — heightened volatility. Because the result of the vote was such a surprise and because there is such tremendous uncertainty regarding the future for the economy of the UK and the EU, we expect a near-term flight to safety and weakness in risky assets, such as stocks.
The decision to leave the EU must still be approved by the British parliament, and then it can take up to two years before the separation is finalized. In the near term, global investors are likely to remain risk averse due to the fear of the unknown. Currencies and stock markets in the UK and Europe are likely to be hit hardest, and the economies in Germany, France and Great Britain could well suffer an economic downturn. The U.S. dollar, gold and U.S. Treasury bonds should rally as investors seek a safe haven, while U.S. stock markets, high yield bonds, commodities and other risk assets will likely be negatively impacted near term.
We recommend investors remain calm and avoid overreacting to the volatility likely to occur. A diversified portfolio holding stocks, bonds and other assets is the best way to weather a storm such as this and may perform much better than the broad equity market. The U.S. economy remains on solid ground, so any near-term correction in U.S. risk assets may likely present a good buying opportunity.
Thank you for your confidence in GuideStone.
GuideStone Capital Management, a controlled affiliate of GuideStone Financial Resources, serves as the investment adviser to GuideStone Funds.
This information is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Investment decisions should be based on an individual’s own goals, time horizon and tolerance for risk. Diversification does not ensure a profit or protect against a loss.