Our last quarterly outlook was published shortly after UK citizens voted to leave the European Union (“Brexit”). Since then, events have unfolded that have potentially complicated the process and extended the timeline.
On Sunday, October 2, new British Prime Minister Theresa May stated that the UK would begin the formal process of leaving the EU (i.e., triggering Article 50 of the EU treaty) by the end of March 2017, which would ultimately lead to the UK leaving the EU by 2019. On November 3, however, England’s High Court ruled that parliamentary approval would be required to trigger the exiting process. An appeal will likely be heard by the Supreme Court in December. If the Supreme Court upholds the decision, parliament could either respect the outcome of the June referendum and approve Brexit or conceivably cancel the process entirely. Any decision will likely be heavily influenced by public opinion, which appears to remain evenly split between the “exit” and “leave” camps.
The direct effect of this news on financial markets is continued uncertainty surrounding the UK economy. Despite this uncertainty, the UK economy has remained relatively healthy. Economists believe, however, that the primary reason for the stability of the post-Brexit UK economy is the Bank of England’s loosening of monetary policy shortly after the vote rather than strong underlying fundamentals.
In our last letter, we explained that investors should remain patient and not make any drastic portfolio shifts because the process by which the UK actually leaves the EU will be long, slow, and complicated, with effects felt gradually over the next several years. Because the timeline for Brexit remains largely unknown, the effects of Brexit cannot at this time be usefully predicted; therefore, our recommendation still holds.