Fortune may not favour the bold in Brexit economic aftermath

The phrase ‘gamechanger’ is often used in situations not fully deserving of the connotation.

However, in the case of the UK decision to leave the EU, it is an entirely appropriate and succinct description of the referendum outcome.

To be blunt, no senior political leaders across Europe believed that there was a legitimate likelihood that the UK would leave and there will now be a scramble to somehow impose penalties on the UK that reflect the decision to leave the EU but that are not overtly harsh that the impact would create further economic pressures on those countries which remain in the EU.

During the peripheral European crisis, significant political capital was expended to maintain the status quo membership within Europe.

This was applied to the point that countries that needed to experience debt restructuring and a temporary EU exit were instead forced in to remain in a union that politicians, but crucially not ordinary voters, believed must be maintained at any cost.

The future of the EU is now the most challenged it has ever been and at its bleakest point.

The risk of a domino effect with several elections taking place next year raises the spectre of further departures, notably the potential of France to hold their own membership referendum should Marine Le Pen continue to capitalise on her popularity.

The decision by the UK electorate to leave will have profound implications covering three main pillars; economic, political and social.

From an economic standpoint, it is now highly likely that the UK will enter a recession in response to the greater uncertainty created by the referendum outcome and it is almost certain that housing prices, a key influencer of consumer confidence, will decline meaningfully over the coming months.

Sterling as a currency should be expected to continue to fall over the coming weeks, providing a benefit for UK exporters but dampening consumers’ ability to purchase goods from abroad and also their ability to spend abroad.

It is likely that the euro will continue to fall against the dollar and European domestic-focused equities are vulnerable. From a monetary policy standpoint, the ECB have all but exhausted their stimulus tools.

The political landscape across both Europe and the US has been changing in recent years, moving further right and reflecting a greater degree of insular behavior among the populace in response to fears of immigration.

The change in the political environment has not been fully understood by investors but there is more and more evidence of election outcomes that would have been considered highly unlikely just several years ago.

We now face the real prospect of a UK led by a jovial but policy-light former London mayor, a United States president intent on building walls sealing the US from its neighbours and restricting immigration status based on religious belief and an increasingly right-wing European political landscape.

Within the UK, the relationship between Northern Ireland and Scotland will likely become increasingly challenged as both governments look set to fight the prospect of being removed from the EU, despite their residents electing to stay.

The UK referendum has also exposed a significant generational gap with the proportion of older Britons voting to leave the EU in a significant number while those under 30 voted wholeheartedly to remain.

Those individuals coming to the end of their respective working lives have now instigated one of the greatest changes in the prospects of a younger generation that was happy to embrace greater inclusion across Europe and a maintaining of the status quo, politically, economically and socially.

From a purely Irish context, corporates are likely to take the next several months to get a feeling for what the market landscape for their operations will look like once the dust settles.

Irish companies with material exposure to the UK face the prospect of a difficult economic environment in the UK to sell their products and services coupled with a negative translation of sterling revenue and profits back to euros.

For investors, the most attractive region of the world will remain the US given its relative stability in a sea of global political and economic change both in Europe and in China.

In such an environment, fortune may not favour the bold and the brave decision may actually be to stand back and fully grasp the changes that have just occurred and the impact they will have on the future.

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