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March 19, 2019

Kevin Karpuk CFA

“Whatever I feel like I wanna do, gosh.” - Napoleon Dynamite
On June 23, 2016, voters in the United Kingdom narrowly passed a referendum to withdraw from the European Union. The British have always upheld a level of independence from the EU by maintaining their own currency, but this vote surprised the markets and caused a short-lived global selloff. Since then, the Brexit process has fluctuated between a slow boil and total bedlam. As the March 29, 2019 deadline for Brexit rapidly approaches, the mood has shifted decidedly towards the latter. 

Some might compare this saga to a soap opera – you can step away for several months and tune back in to see the same plotline – but a teenager with lenient parents may be a better comparison. The process has had fits and starts throughout, but most of the drama has been internal to the UK. The EU has largely stayed unified but aloof as its soon-to-be prodigal child figures out exactly what it wants to be in the future.  

The EU has maintained a few hardline negotiating points, but the leadership of the bloc understands that the UK is a major trading partner. With much of Europe teetering on the brink of recession and a free trade pact likely to require months of additional negotiation, pushing the UK out in a disorderly fashion would have a negative impact on the continent’s mainland. 



Estimates of the economic impact of Brexit vary, but the IMF[1] has pegged the long-term drag on the UK’s economy to be somewhere between -2% and -8% of GDP, depending on Brexit’s eventual form. Given that drop in future growth, the graph above should not be a surprise. Since June 30, 2016, the European Monetary Union’s (MSCI EMU) index has outperformed the UK’s stock market (MSCI UK) by almost 7%; however, of interest to domestic investors, the British pound has depreciated little versus the US dollar, as exemplified by the minimal difference between the MSCI UK and MSCI UK Local Currency indices.  

England’s central bank has been managing this breakup to the best of its abilities, but one must wonder whether the Bank of England has the firepower to prevent a market-driven devaluation in their currency should a “hard Brexit” occur. As a reminder, depreciating foreign currencies hurt the investment returns of overseas investors, including those in the US.  

The UK’s parliament has provided much entertainment over the past several years, but the time has come for it to decide its future. Its three choices are to: run a new referendum and possibly stay in the EU, negotiate a “soft Brexit” which would maintain many of the existing benefits of EU membership, or continue to act petulantly and trigger a “hard Brexit.”  

The UK is a top 10 global economy, so the last option would have global repercussions. As investors, we do not necessarily need the prodigal child to return home, but we do wish them to avoid unnecessary pain. This issue will likely drag out for some time, so we also hope that the EU pursues patience rather than eviction.

In closing, I wanted to take a moment to congratulate our President, Skip Cowen, for being named as one of Barron’s Magazine’s Top 1,200 Financial Advisors[2] again in 2019. Thank you, as always, for taking time out of your day to read this issue of Independent Insights. Enjoy your spring, and we look forward to seeing you soon! 
 
[1] International Monetary Fund “United Kingdom: Selected Issues” November 2018.
[2] For more information on how the ranking was compiled, please click here.

Kevin Karpuk, CFA Chief Investment Officer

Kevin is Cornerstone’s Chief Investment Officer and is involved with the firm’s Investment Policy and Strategic Planning committees. Kevin joined the company in 2000 after graduating from Lehigh University with a B.S. and M.S. in Economics and earned his CFA charter in 2005. Kevin and his wife Kat support many charitable causes and have established a donor advised fund to propagate their philanthropic interests. They live in Bethlehem with their two cats: Zola and Charlyne, enjoy woodworking, gardening, reading and travel. Kevin is the proud uncle to many nieces and nephews and loves spending time with and spoiling them.

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