If you think American politics are in chaos, take a gander across the pond. On June 23, a British referendum will ask voters: “Should the United Kingdom remain a member of the European Union or leave the European Union?” The potential event has been coined the “Brexit.”
A Financial Times opinion piece recently complained that the referendum campaign has “rapidly descended into vitriolic hyperbole, making a rational judgment on whether to vote ‘Remain’ or ‘Leave’ difficult.” Vitriolic hyperbole— sound familiar?
Initially, polls showed that Remain was headed for victory, but now a predicted result is too close to call. A vote to exit the EU will likely cost Prime Minister David Cameron his job. Former London Mayor Boris Johnson is waging a fierce campaign in favor of the Brexit.
The EU is an economic and political partnership of 28 European countries. Nineteen members, including Germany and France, are united under a single currency, the euro. Britain, although a member of the EU, still has its own currency—the pound sterling.
Since Britain has the pound, a Brexit would be less complicated than the once-discussed “Grexit,” when Greece considered leaving the EU in 2010. Greece’s currency is the euro, making a financial separation from the EU more complex.
Proponents of Britain’s exit say the EU imposes too many rules on business, and the financial costs of EU membership don’t justify the return. They point to a high level of immigration among EU countries, leading to fears that the UK is losing control of its borders. One of the key principles in EU membership is free movement, which means you don’t need a visa to live in another EU country.
Unwinding the UK from the EU after more than 20 years of membership would be a long, messy task. Advocates of remaining say leaving would dampen future investment and sink the value of the pound. They believe EU membership allows for better trade deals and that immigrants coming into the UK are workers who fuel growth and help pay for services. Leaving would damage Britain’s standing on the world stage.
Many of the arguments on both sides are similar to some of the populist sentiment that has gathered steam in the United States.
However, at its core, the unrest is the result of seven years of global economic malaise. Voters in the U.S. and the UK are threatening to reject the status quo; however, the answers probably won’t be found in a new set of leaders or more inward-looking economic policies. The solution is a more vibrant global economy, which will take more time to materialize.
What does this mean for investors in the U.S, the UK, or around the world who are making decisions amid this political uncertainty? Very little to a long-term investor. American business has navigated plenty of turmoil and produced attractive results for investors. The Dow Jones industrial average crossed 1,000 for the first time in 1976 and today stands at 18,000. An 18-fold return in 40 years is 7.5 percent annually, but it wasn’t accomplished without ups and downs in between.
The same will be true in the future. Investors who identify good businesses, with good management, selling for reasonable valuations, will be rewarded over a long period.•
Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or email@example.com.