Whereas the short-term economic impact of the historic decision by voters in the U.K. to leave the European Union is making itself felt much as expected, the long-lasting significance of the “Leave” campaign’s victory lies in the future. The increased market volatility, drop in the pound and euro against the dollar and fall in U.K. sovereign debt yields that have followed the vote were all widely expected. Risk assets in general are likely to have a difficult time for a while and global investors will find both risks and opportunities before markets and policymakers eventually turn their attentions to the next source of uncertainty. They may not have long to wait.
The potentially long-lasting significance of the U.K. exiting the EU for long-term investors is how it reveals that what may have appeared to be the settled order of the global economy is not so settled after all. One of the fundamental ideals upon which the EU is built is the premise that its member states are working toward an “ever-closer union” economically and politically. By demonstrating that movement toward a globalized future organized around supranational trade and political entities is not irreversible, the U.K. voters’ example is likely to inspire challenges elsewhere to trade and political unions that are seen as diminishing national sovereignty.
Signs of more referendums to come are already appearing elsewhere in Europe, where the likelihood is high that at least one other state such as Austria, Finland or the Netherlands will put EU membership to a vote. Polls in those countries suggest votes to exit would likely succeed. Symbolically at least, the departure of the Netherlands would be very significant as it was among the EU’s founding members following World War II. None of these departures alone would spell the end of the EU. But neither would they increase certainty about the union’s future prospects. The idea that the world’s largest economic entity now must add a protracted existential crisis to its lengthy list of troubles does little to increase its attractiveness for investors seeking reliable returns and manageable risks.
For U.S. investors, the EU referendum and subsequent challenges to the established global economic order may provide further temptation to eschew international investment in favor of the presumed safety to be found in U.S. assets. But the potential for the unwinding of the established economic order is not confined to Europe, of course. The success of Donald Trump in capturing the Republican presidential nomination has relied partly on his harnessing of discontent with the effects of increased economic integration within North America, partially as a result of the North American Free Trade Agreement. Regardless of what happens to Trump’s campaign, the circumstances and sentiment that made his initial success possible are unlikely to disappear.
Whereas none of these developments would bring globalization to a halt, nearly all of the developed countries that created its legal foundations, including the World Trade Organization and the General Agreement on Tariffs and Trade, find themselves facing rising internal dissent and political impulses toward re-erecting barriers to trade and migration. Now that voters in the U.K. have acted on those impulses despite the uncertainty about where they may lead, the question for investors becomes, Who’s next?
Paul Markham is portfolio manager and part of the global equity team at Newton Investment Management, a global investment management subsidiary of BNY Mellon, in London.
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