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'Brexit Day' and Institutional Investors

After a 47-year relationship, the United Kingdom is no longer legally a member of the European Union. The U.K. will cease to attend EU meetings and, while continuing to follow EU rules, will have no input on the bloc’s policies. Britain’s flag was removed from the European Council and Parliament buildings, and Britain's Brussels post will become the British Embassy to the European Union.

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In the U.K., ceremonies tried to strike a balance between celebrations for those who voted to leave while avoiding upsetting the portion of the country that voted to remain. On the financial markets, the pound felt the love as it strengthened as compared to the euro. That said, Britain grew at its slowest pace in 2019 since 2010, and the Bank of England lowered growth expectations from 1.25% to 0.75%.

In Europe, the emotions were more disheartened. President Emmanuel Macron of France called it a sad day while telling his fellow Europeans that a unified Europe has the potential to be better than before. Macron’s confidence was not seen in the markets as the MSCI Europe Index declined over the day (albeit on a day global markets fell as well). Additionally the impact of Brexit has already hit the European economy, with slowdowns resulting in 19 euro zone countries only growing approximately 1.2% in 2019.

Despite waiting 3½ years to reach this moment, uncertainty endures as there is still more to be done. A transitional period will ensue for the next 11 months. During this time much of the relationship will stay the same. The U.K. and the EU certainly have their work cut out for them this year with decisions to be made on trade, data sharing, security, banking, aviation, and more. Perhaps more importantly, the impact at the end of the year will be most strongly felt by British citizens living in EU countries, and vice versa, as they will need to apply for residency rights in order to stay.

Institutional investors should react to this historic moment with appropriate caution. As with all of their investment planning, there is no need for sudden changes given their long-term investment horizons. As they assess their portfolios in the wake of “Brexit Day,” they may want to evaluate their allocations if any to active managers with positions in both the U.K. and Europe and assess how those managers are addressing the post-Brexit financial landscape. These discussions should be ongoing as Brexit unfolds and future developments affect the long-term picture for European markets.