How Should You Invest After The Brexit Vote

Britain’s decision to exit the European Union has profound implications for the global economic structure. But how does this impact you as an investor? Let’s take a look at how the global business may be affected and how you may want to reposition your investments to take advantage of the changes or at the very least protect the investments you have today.

2 Steps Back for Globalization

We have had decades of globalization characterized by opening up of national borders, free trade agreements, and in some cases monetary union. The easing of the barriers to capital flows and people movement allows the resources to move where they are more needed and helps improve the economic well being of citizens by providing them more and better opportunities.

Globalization is rooted in the Ricardian Theory of Comparative Advantage, which states that countries specialize in producing goods and services that they are more efficient in, so they can trade with other countries that produce other goods and services. The Theory of Comparative Advantage works when the markets are undistorted. When the economic landscape is broken into many smaller pieces, each with its own trade barriers and economic paradigms, each piece or country produces inefficiently. Higher costs of production lead to higher cost of living and decreased prosperity.

In most ways, if Britain honors the referendum and exits the EU (as a democracy they are bound to respect the will of the people), the economic future of the country is grim. A recession in the short term is likely. We will also see many companies with offices or facilities in Britain leave the country as their location limits their access to EU, which is undoubtedly a bigger and more lucrative market compared to Britain. As a starter, it is becoming more expensive for Britain to borrow in the open market (ref: Moody’s changes outlook on UK sovereign rating to negative from stable)

Start of a Trend?

The British vote is hardly an anomaly. Populism is on the rise and there are many groups and parties in countries like Spain, Italy, France, Netherlands and Greece that are opposed to EU and the requirements to remain in good standing in the community. On the flip side, citizens of Germany that has been doing the bulk of heavy lifting in EU do not like subsidizing other economies. The union is not based upon a shared belief and it will not surprise anyone if other countries decide to hold their own referendum and choose to exit the EU.

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Disclosure: We do not own a position in any of the stocks mentioned above in the Value Stock Guide Portfolio. However if a further review finds any of these stocks ...

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