ISSUE 32: 2017

Global Insights

The Ripple Effect of Brexit

The repercussions of the UK’s vote point to an uncertain future across the Eurozone and elsewhere — at least for the time being.

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When the British voted last year to leave the European Union (EU) after more than four decades of membership, jaws across the globe dropped in shock. Most UK polls had indicated strong support to stay, yet 52 percent of voters elected to leave. In response, pro-EU Prime Minister David Cameron resigned, the British pound plunged to lows not seen in 30 years and populist movements in other EU nations stood up and said, in effect, “We’re next.” To shed some light on “Brexit” and its repercussions, Capital Acumen spoke with U.S. Trust’s 

Christopher Hyzy, chief investment officer, and Karin Kimbrough, head of Investment Strategy at Merrill Lynch Wealth Management. Their comments have been edited for clarity and space restrictions.

Britain’s surprise vote, the rise of “leave” campaigns elsewhere in the EU and the election of Donald Trump all seem connected. What’s going on?

Chris Hyzy: There is a rising populism around the world that probably got its start in 2011 with the Arab Spring — ordinary people protesting their governments for perceived unresponsiveness. In fact, in the U.S., you can trace it back even earlier, to 2008 at least. After the market crashed, the central bank led quantitative easing programs that helped troubled areas of the U.S. economy. But the lack of attractive nominal growth that followed may have left some segments of the population — those facing persistent income inequality — feeling like they were being left behind. And in the recent election we saw what amounted to voter backlash. 

What are Britain’s next steps?

Karin Kimbrough: The next key step at this time is for Prime Minister Theresa May to invoke Article 50 of the Lisbon Treaty, the EU’s legal mechanism for withdrawal, which once triggered, requires exit within two years. That could feasibly push Brexit to 2019 — later than initially expected. This February the British Parliament — as required by the UK’s High Court — voted overwhelmingly in favor of starting the exit process, moving Britain a step closer to separation.

More than six months after the Brexit vote,
how is the British economy faring?

Kimbrough: Initial expectations were that it would be negative for the UK economy, but so far there is little evidence of that. The Bank of England stepped in with a stimulus package, including an interest rate cut, which seemed to help. Near-term, economic data — retail sales, the labor market, and so forth — has, if anything, shown improvement. That said, many economists think the economy will slow somewhat in the long term. 

Many Economists Think the UK Economy Will Slow Somewhat in the Long Term.

Hyzy: Given how exposed the UK is to the EU in terms of trade, the British government will likely have to renegotiate many trade agreements, not only with the EU but also with other nations. 

How is the EU government responding?

Kimbrough: The UK seems formally opposed to some elements of membership but not others, and may be hoping to “cherry pick.” It might like to keep borders open for trade, for instance, but not for people. But EU lawmakers are basically saying, “It’s all or nothing, no cherry picking allowed.” This is often expressed as a “soft exit” versus a “hard exit” and we believe that ultimately it will be the latter. 

Elsewhere, populist anti-EU movements are on the rise.
Could there be other splits?

Kimbrough: That’s not entirely clear. In an early December vote, Austria rejected far-right presidential candidate Norbert Hofer. But in the same week, Italian voters blocked constitutional amendments in what many viewed as a win for “Eurosceptic” populist parties. Meanwhile, Marine Le Pen, leader of France’s far-right National Front party and a likely frontrunner in this year’s presidential election, seems emboldened by the Trump win. 

How’s the Euro doing in all of this?

Hyzy: The Euro has weakened versus the dollar since Brexit and could be seriously tested by upcoming elections — and a further rise in populism and protectionism — in France, Germany and elsewhere.

What could Brexit mean for U.S. corporations?

Hyzy: In industries such as finance, healthcare and energy, many companies have invested billions of dollars in the UK over the decades on the premise that it would remain in the EU; indeed some have used the UK as their EU entry point. Now, many may wonder if this commitment is still worthwhile. It’s a question U.S. investors need to keep in mind looking ahead. Any delay in initiating Article 50 may help in the short term.  

For more on the rise of populism and protectionism, see “Making Globalization Work for Everyone."

Source for slideshow: The New York Times, 2016.

IMPORTANT INFORMATION

Investing involves risk. There is always the potential of losing money when you invest in securities.

Projections made may not come to pass due to market conditions and fluctuations.

Past performance is no guarantee of future results. Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither U.S. Trust and its representatives nor its advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

International Investing International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments.

Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

*** Merrill Lynch Wealth Management makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated, a registered broker-dealer and Member SIPC, and other subsidiaries of Bank of America Corporation.

Projections are subject to change.

All sector recommendations must be considered by each individual investor to determine if the sector is suitable for their own portfolio based upon their own goals, time horizon, and risk tolerances.

When the British voted last year to leave the European Union (EU) after more than four decades of membership, jaws across the globe dropped in shock. Most UK polls had indicated strong support to stay, yet 52 percent of voters elected to leave. In response, pro-EU Prime Minister David Cameron resigned, the British pound plunged to lows not seen in 30 years and populist movements in other EU nations stood up and said, in effect, “We’re next.” To shed some light on “Brexit” and its repercussions, Capital Acumen spoke with U.S. Trust’s Christopher Hyzy, chief investment officer, and Karin Kimbrough, head of Investment Strategy at Merrill Lynch Wealth Management. Their comments have been edited for clarity and space restrictions. Britain’s surprise vote, the rise of “leave” campaigns elsewhere in the EU and the election of Donald Trump all seem connected. What’s going on? Chris Hyzy: There is a rising populism around the world that probably got its start in 2011 with the Arab Spring — ordinary people protesting their governments for perceived unresponsiveness. In fact, in the U.S., you can trace it back even earlier, to 2008 at least. After the market crashed, the central bank led quantitative easing programs that helped troubled areas of the U.S. economy. But the lack of attractive nominal growth that followed may have left some segments of the population — those facing persistent income inequality — feeling like they were being left behind. And in the recent election we saw what amounted to voter backlash. What are Britain’s next steps? Karin Kimbrough: The next key step at this time is for Prime Minister Theresa May to invoke Article 50 of the Lisbon Treaty, the EU’s legal mechanism for withdrawal, which once triggered, requires exit within two years. That could feasibly push Brexit to 2019 — later than initially expected. This February the British Parliament — as required by the UK’s High Court — voted overwhelmingly in favor of starting the exit process, moving Britain a step closer to separation. More than six months after the Brexit vote, how is the British economy faring? Kimbrough: Initial expectations were that it would be negative for the UK economy, but so far there is little evidence of that. The Bank of England stepped in with a stimulus package, including an interest rate cut, which seemed to help. Near-term, economic data — retail sales, the labor market, and so forth — has, if anything, shown improvement. That said, many economists think the economy will slow somewhat in the long term. Many Economists Think the UK Economy Will Slow Somewhat in the Long Term. Hyzy: Given how exposed the UK is to the EU in terms of trade, the British government will likely have to renegotiate many trade agreements, not only with the EU but also with other nations. How is the EU government responding? Kimbrough: The UK seems formally opposed to some elements of membership but not others, and may be hoping to “cherry pick.” It might like to keep borders open for trade, for instance, but not for people. But EU lawmakers are basically saying, “It’s all or nothing, no cherry picking allowed.” This is often expressed as a “soft exit” versus a “hard exit” and we believe that ultimately it will be the latter. {% slideshow 1586 %} Elsewhere, populist anti-EU movements are on the rise. Could there be other splits? Kimbrough: That’s not entirely clear. In an early December vote, Austria rejected far-right presidential candidate Norbert Hofer. But in the same week, Italian voters blocked constitutional amendments in what many viewed as a win for “Eurosceptic” populist parties. Meanwhile, Marine Le Pen, leader of France’s far-right National Front party and a likely frontrunner in this year’s presidential election, seems emboldened by the Trump win. How’s the Euro doing in all of this? Hyzy: The Euro has weakened versus the dollar since Brexit and could be seriously tested by upcoming elections — and a further rise in populism and protectionism — in France, Germany and elsewhere. What could Brexit mean for U.S. corporations? Hyzy: In industries such as finance, healthcare and energy, many companies have invested billions of dollars in the UK over the decades on the premise that it would remain in the EU; indeed some have used the UK as their EU entry point. Now, many may wonder if this commitment is still worthwhile. It’s a question U.S. investors need to keep in mind looking ahead. Any delay in initiating Article 50 may help in the short term. For more on the rise of populism and protectionism, see “Making Globalization Work for Everyone." Source for slideshow: The New York Times, 2016. IMPORTANT INFORMATION Investing involves risk. There is always the potential of losing money when you invest in securities. Projections made may not come to pass due to market conditions and fluctuations. Past performance is no guarantee of future results. Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets. Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither U.S. Trust and its representatives nor its advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors. Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy. OTHER IMPORTANT INFORMATION International Investing International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. *** Merrill Lynch Wealth Management makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated, a registered broker-dealer and Member SIPC, and other subsidiaries of Bank of America Corporation. Projections are subject to change. All sector recommendations must be considered by each individual investor to determine if the sector is suitable for their own portfolio based upon their own goals, time horizon, and risk tolerances.