The Results

Britain voted 51.9% to 48.1% in favor of leaving the EU, of which it has been a member since 1973.  The voter turnout was 72.2%.

Scotland and Northern Ireland voted strongly favour of remaining as part of the EU (62% and 55.8% respectively). England and Wales voted to leave by a relatively narrow margin. Voter turnout in these four nations was strongest in England (73%), followed by Wales at 71.7%; both Scotland and Northern Ireland saw voter turnout below 70%, lower than the 84.6% during the 2014 Scottish referendum.

The BBC link below breaks down the results with various maps and charts:

http://www.bbc.com/news/uk-politics-36616028

The Immediate Aftermath

The GBPUSD, which had traded higher before the vote (over $1.50) plunged a record 10% as the outcome of the referendum became clear. The currency touched a three-decade low of $1.3229, and is currently around $1.38.  In Canadian terms, The GDBCAD fell from around $1.90 to $1.72 and now sits at $1.77.

Rating agency S&P has already confirmed that the UK is likely to lose its final AAA credit rating.

David Cameron announced he will step down from his post by October.

Markets Today

Not surprisingly, Global financial markets sold off sharply early Friday morning. There has been a strong knee-jerk sell-off in risk assets.

The Nikkei (Japan) and Dax (Germany) were down 7.9% and 6.9% respectively.  The French CAC was down 6%.  Italian and Spanish markets posted their sharpest one-day drops ever, falling more than 12%.

London’s FTSE fell by 9% initially but has since reclaimed part of that drop to finish down 3.2%.  Some investors are speculating that the plunge in sterling could benefit Britain’s economy.  Some names in the UK financial sector fell as much as 30% before cutting losses in half later in the day.

The Toronto stock market (TSX) plunged more than 300 points within minutes of opening this morning but recovered slightly afterwards. The TSX ended down 239.5 points, or 1.69%, to 13,891.88.

The S&P 500 fell 3.6% to 2,037.35 in New York, the most since August 2015. The benchmark erased its gain for the year, which reached as much as 3.7% earlier this month. The Nasdaq Composite Index tumbled 4.1%, the most in almost five years.

The risk-off sentiment is also hitting commodity prices, driving oil down by 3.6% to $47.60 U.S. per barrel, putting further downward pressure on the Canadian dollar.

Gold prices benefited from the flight to safety, with prices rising to as high as $1,258 (U.S.) per ounce – the highest since early 2014.

What Happens Next?

As stated, Prime Minister David Cameron and head of the Remain campaign announced he will step down as leader of the Conservative party and be replaced by a leader of the Leave campaign within the next few months, before the Conservative Party Conference in early October.

The Bank of England’s contingency plans kick in – The UK will have two years to negotiate a deal with the EU.

According to European Commission President Juncker, Britain will have to negotiate withdrawal terms first, before talking about how the new relationship will work. In other words, there will be a deep dive into what other options or alternatives are available to the U.K. There is a web of issues around regulations and trade. Anti-EU parties in other countries will be watching closely, as an amicable split may fuel further efforts to exit the EU.

Impact on North America

The most immediate impact on the North American economy will come from today’s financial market volatility in the aftermath of the vote. The Federal Reserve has been very aware of global economic risks, and a Brexit qualifies, which rules out a July rate hike. A rate increase by December remains a possibility, if markets soon calm and the near-term economic fallout is minimal.

With Fed rate hikes now delayed even further, The Bank of Canada is expected to remain on hold until at least the end of 2017.  Consequently, global bond markets will be well supported, with yields likely drifting even lower in the near term.

The long-term economic consequences will be unclear for some time due to the two-year negotiation period.  However, the U.K accounts for a modest 3% of total U.S. trade and an even lesser 2.5% of Canadian trade. Such small shares and the likely modest impact on total trade suggest the direct risk to the North American economy is minimal.

In general, significant pullbacks in global stock markets tend to present opportunities for longer-term investors, although volatility can persist for weeks or months.  Many equity funds have been positioned conservatively and have been holding higher than normal cash positions in anticipation of these results.  This is when we would expect that cash to be deployed to buy companies at depressed prices.

Longer-Term Perspective

It is important to separate the short-term and long-term effects. Over the long run, the impact on the stock market and bond market should be considerably less.  The U.K. represents less than 3% of global GDP. These are still very early days, and developments in the relationship between the U.K. and EU are expected to play out slowly over many months or years.

The exit could cause the U.K. economy to meaningfully underperform, if not tip into recession.  The UK job market will likely suffer, particularly the financial services (which accounts for 8% of British GDP).   A number of global banks could potentially relocate some of their operations out of the UK.

The Eurozone will feel the biggest brunt of slower UK growth, as it sends roughly 16% of its total goods exports to the UK.

Foreign investment may decline as access to other EU markets could become much more limited. British goods trade with the EU account for 45% of exports and over 50% of imports.  And, the EU may not let go easily; they could make this difficult in order to discourage other countries from contemplating departure.

The issue of Scotland’s independence is also likely to again come to the fore, further weakening Britain’s
position, especially since the Scots voted heavily in favour of staying in the EU.

There are likely to be some positive offsetting impacts. UK domiciled industry may seek to move or extend operations within the union as quickly as possible, boosting EU investment. Similarly, EU firms that have deep ties to the UK could relocate or expand operations into the UK, offsetting the decline in investment due to increased uncertainty.

Overall, the impact should be somewhat negative due to higher tariffs, less immigration and the slight diminishment of London as a financial hub. This means that Brexit hardly prophecies economic stagnation for the U.K., though it does unhappily shave as much as a quarter percentage point off growth annually over the coming decade. Potential savings on transfers to Brussels and greater regulatory sovereignty are attractive, but do not constitute complete offsets. But the precise effect depends enormously on what sort of subsequent relationship the U.K. negotiates with the EU.

Bottom Line for Investors

This event will indeed lead to greater political uncertainty and financial volatility.  A UK separation from the EU will take years to negotiate.  Meanwhile, companies continue to do business much as they did before and the global economy continues on its path of slow but positive growth.

Your portfolios are globally diversified and are constructed to mitigate against volatility.  In fact, we expect many fund managers to take advantage of the current stock market decline and use it as an opportunity to buy quality companies at attractive prices.

If you have any questions about your investments, please feel free to contact us anytime.

Sources: TD Economics, Financial Post, BBC, Globe & Mail