The Brexit-effect: what does not kill you makes you stronger? - July 03, 2016

The Brexit-effect: what does not kill you makes you stronger?

The UK referendum surprised the markets and brought a fall on the stock exchange that we haven’t seen in a while. What’s more, it pushed the GBP into a 30-year depth. The fall seems even harder as the markets were optimistic on the week before the referendum. In the near future, uncertainty might be a part of the markets and politics but we don’t need to panic since markets will probably normalize and this might be a chance to get into investing.

Changing or neglecting the results of the referendum may lead the UK to chaos on the political level but still, referendums in the Kingdom aren’t legally binding. The local fight has already started, and some believe that David Cameron’s step down was a trick to destroy his opponents.

The easiest solution for the UK would be to quit the Union but stay part of the European Economic Area (just like Norway). This may soften the economic shock but may lead to another problem: most promises of the Brexit campaign may become false, since a huge part of EU’s rules may stay intact, including the free movement of persons. Another important question is: what would happen to Northern Ireland and Scotland? The latter basically stayed in the UK only to retain its part in the EU. Now they may go for the independence again.

As we can see, there are lots of uncertainties and risks on the markets right now. This situation may not change until October since Cameron stepped down, and there may not be any new PM to trigger Article 50.

What will happen to the EU?

Many believe that the British always were the outsiders of the European Union: dissatisfied all the time and trying to steer the integration in a different direction. They were also a quite important economy, so the other members had to give in for some of their wishes. This weakened the EU many times and not only made the ongoing integration harder but the system even more complicated.

Some believe that now, without the British, the EU may have a chance to tighten its integration and make things easier. However, we cannot know what the future of the integration will bring, since the European Union has no real schedule for a situation like this. The German and French already have new plans: they are planning to strengthen the integration in some areas but give more freedom in others. In the meantime, the UK will stay a healthy economy and the rule of law will remain.

What will happen to the stocks?

Brexit will not influence the performance and profit of the companies on the stock exchange, or at least there are more important things to keep an eye on at the moment. Volatility will probably stay but may shrink with time. A period of market correction may come after the radical changes we’ve seen in the last days.

It’s important to underline that Brexit may be an important historical event but it’s not comparable to the financial crisis of 2007-08. Mostly because the Crisis was unpredicted and unforeseen but Brexit – even if it was unlikely – gave time for preparations to the federal banks and member states.

There’s a good chance that things will just go on as they did in the last years: there will be an economic growth in the world but as there’s no real interest rate, investors will buy instruments (like stocks) since that’s their only chance to gain profit.

Altogether, we believe that Brexit may leave its mark on the European markets, but after a short period of dramatic changes, markets will balance themselves. Therefore, this might be a good time to start investments. Gold started to rise after the Brexit, and the US markets may also be another great idea to discover. At the moment they are relatively free from the European crisis, and may perform even better. We can see that Brexit didn’t really hit hard the S&P500:

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Innovative Securities’ Profit Gold can help you to invest easily in gold, while Profit Max is a highly diversified portfolio containing a great amount of US stocks.