Keep Calm and Invest On
In the wake of World War II, the British (UK) government printed posters featuring the phrase "Keep Calm and Carry On" to calm the fears and avoid panic among the British public over widespread concern of air attacks. The famous WWII British response to fear over the bombing of London and other cities has seen a resurgence in popular culture in the United States and elsewhere.
Unfortunately, very few investors actually follow the philosophy of the phrase in responding to news of the day. The last UK vote to exit from the European Union (EU) brought with it a 7% drop in UK stocks and a 5% drop in the U.S. stock market. Of course, both markets had fully recovered within a week of their initial fall.
How Should You Invest Based On The UK Election Results?
The answer: the same way you did before the election. Although you may be reading this article after the June 8th UK election, the article was written before the election. The reason is simple, no matter what happens in the UK election, your investments should stay the course, following the strategy which is right for your long-term goals.
Ultimately, Nothing Will Change If The UK Exits The EU
Although the election will change the British government, and could quicken the UK exit from the EU, the election won't change the fundamentals of your investments. International stocks in general, and European stocks in specific, will continue to behave much the same over the long-term whether the UK is part of the EU or not. If you should have international stocks in your portfolio before the Brexit, you should have international stocks in your portfolio after.
The UK will still trade with the U.S.
UK companies are unlikely to see a change in their sales to U.S. markets, and U.S. companies will continue selling to UK customers. The U.S. is the single largest trading partner with the UK. According to the US Census Bureau, over $100 billion of trade occurred between the UK and the U.S., with an almost equal balance of trade. Neither the companies nor the governments of either country are willing to lose the enormous economic engine represented by US/UK trade.
As a result, any trade barriers created by the Brexit will quickly be quashed by new trade deals. Further, Brexit is not likely to change how many Londoners want to buy Ford trucks, nor will it change how many Californian's fill up their tank with BP gas. For companies in either country, the Brexit is unlikely to alter sales to customers in the other country.
The UK will still trade with the EU
If you think the $100 billion in trade between the U.S. and the UK is incentive to strike new trade deals, the trade between the UK and EU countries dwarf it. UK trade with Germany alone is larger than with the US, with the UK exporting 40 billion euros worth of goods to Germany and buying 80 billion euros from German companies. Germany is highly unlikely to want to lose this beneficial trade surplus by punishing the UK with trade barriers.
Other EU countries have similar strong trading ties with the UK, and will likely want to keep the flow of goods and services going. As a result, the EU and the UK are also likely to quickly negotiate new trade deals and even immigration treaties which look similar to the 'free trade' standards under the EU model.
Ignore the UK Votes
Although political geeks will be closely following and debating the UK election and the Brexit, investors should ignore the noise. Your investments will be largely unaffected by the votes, and any potential losses should result in a gain for other companies in your portfolio. A properly diversified international equity portfolio should absorb any impact the Brexit could make. For a more detailed look at the Brexit, read Why Brexit won't impact your investments.
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Joshua Escalante Troesh is a tenured professor of Business at El Camino College and the founder of Purposeful Finance. His career provides him with a unique insight on personal financial, having been a VP at a financial institution leading up to 2008, and involved with technology and internet stock research leading up to 2000. He can be reached for comment at info@purposefulfinance.org