Charting the Uncharted: Brexit’s Impact on U.S. Markets

By Bradley Ross, Vice President, Calmwater Capital

With “What is Brexit?” being the most searched phrase on Google domestically just after the vote, it was clear most British voters did not fully understand the referendum’s ramifications. The immediate effects were relatively easy to quantify, with an immediate decline in post-vote stock and currency trading. Beyond that, both British and international markets shrugged off these initial losses and quickly entered a recovery phase. As a result, declines in stocks were erased within days of the June 23 vote, and the slide in exchange rates was much less dramatic than previously expected.

Since it will take years to unwind Britain from the European Union, and given that there is no baseline scenario for comparison, the long-term trajectory for the country and consequences of Brexit worldwide are difficult to evaluate. Together, all of these factors lead to uncertainty—investors’ least favorite word.

Seeking Safety Across the Pond

In the current global financial climate—with slowing growth and policy setbacks—investors are clinging to assets that have sustainability and predictability. As such, it’s easy to understand the post-Brexit rush for haven assets, including real estate.

U.S. debt and property markets are among the biggest post-Brexit winners thus far, as the most popular destinations for international capital flows are these relatively predictable and stable U.S. assets. Despite Treasury yields slumping immediately after Brexit, the pricing on U.S. debt and properties posted gains, proving their attractiveness to investors. From a longer-term perspective, the Federal Reserve’s policy over the last decade has resulted in an ultra-accommodating monetary environment that has added to the global perception of the U.S. as a safe, albeit lower-yielding, investment market.

Challenges to Post-Brexit Gains for U.S. Debt and Property Markets

There are, nonetheless, certain obstacles to ultimate U.S. investment attractiveness that might impair the positive effects of Brexit on the U.S. debt and property markets.

For one, the uncertainty in U.S. politics—with both an isolationist sentiment and disenchantment with trade agreements gaining momentum—might stave off many would-be investors into the U.S. Adding to this cautiousness, investors are fearful of the next recession, given the mature market cycle, and are concerned about the slowing growth across many sectors of the U.S. economy.

Thus far, though, these challenges have not proven to be a significant detriment to the role of the U.S. as an investment haven for Brexit flight capital and investors, and the U.S. should continue to see increased foreign interest in its debt and property markets as a result.