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From the President
Written by Mark H. Kajita, CPA
President and CEO
Baker Boyer Bank

The historic BREXIT vote has now finally been resolved, and what was only a wish for many in the United Kingdom (UK) is now a reality. There will be many historians, who analyze why this happened, or what could have changed the vote, but the reality is that for Britons, the world of today is vastly different from the day before.

Now that the citizens of the UK (membership which includes England, Scotland, Wales and Northern Ireland), have voted how did we get here and what are the likely steps to move forward?

  • The United Kingdom elected to join the European Union (EU) and merge common economic and political ties with the European Continent in the 1970s. Although member states have the right to manage their own internal affairs, the EU has its own parliament and enacts rules, regulations and agreements that will be enforced on every member state.
  • In addition, a common currency was formed to allow for more efficient trade amongst member states. Although most countries’ currencies were abolished and moved to a standard Euro denomination, the UK maintained its own currency based on the Pound note.
  • As time went on, many Britons felt that although there were economic advantages to being in the EU, they didn’t feel the advantages outweighed both the social and economic costs. On June 23, 2016, a majority of Britons voted to exit the EU (dubbed BREXIT), in order to strengthen their own independence.
  • Now that BREXIT has begun, an untried process of de-unification will commence.
  • The UK parliament will likely enact Article 50 of the EU constitution, which allows individual nations to exit the European Union.
  • Prime Minister Cameron has decided to resign in the autumn of this year, allowing a new Prime Minister to be elected and seat a cabinet. During this time he will not enact Article 50 as he believes this should be the decision of the next Prime Minister. Effectively he is giving the United Kingdom a 90 day cooling off period to regroup and think through a BREXIT strategy.
  • Once Article 50 has been enacted, a process that can take a minimum of 2-years will commence to untangle the UK from trade agreements, social welfare mandates and other regulatory obligations.
  • At the end of the Article 50 process the UK will be officially an independent sovereign nation devoid of obligations to the EU.
  • Once BREXIT is complete new trade and other agreements will need to be enacted in order to allow the UK to commence business as an independent country with other countries within the EU. The EU has said it would only negotiate new trade and other agreements after the UK has fully exited the EU.
  • I liken the BREXIT vote to opening the door to independence, but the process to exit the door will be agonizingly slow. For investors this will give them plenty of time to adjust to the new reality of the EU without the UK.
  • Complicating this turn of events is the fervor of additional countries to put to their own electorate a BREXIT style referendum. Countries considering this option are Spain, Italy, the Netherlands, Czechoslovakia, Greece, Austria, and Sweden.
  • Scotland, who voted overwhelmingly to stay in the EU, is also reviewing their options and considering a separate Scottish independence vote in order leave membership in the UK and opt out of the Article 50 enactment.

In the coming days you will hear much in the news about BREXIT. Although much speculation has taken place about what BREXIT would mean to markets around the world, it is our belief that after the initial shock of BREXIT, markets will stabilize and strengthen. Much of the current losses in the markets are retractions from earlier gains in the weeks prior when BREXIT seemed unlikely.

I would also like to add that although global markets may be fluctuating in the next few months, that does not mean that individual companies are overly priced. The fluctuations are simply a reaction to investors reallocating their capital to companies who would be less impacted by BREXIT in general. Evidence of this is seen in the larger losses felt in European equity markets in contrast to those of the U.S.

I recommend you also read a very well written article by John Cunnison explaining what BREXIT is and how Baker Boyer’s investment options are particularly suited for the market volatility that BREXIT has presented (click here to read the article).

Over the next months, Europe will need to grapple with many issues relating to accommodations to member countries who wish to stay in the EU. These negotiations will not be concluded quickly. Instead, like the process of BREXIT, much time will be given to address each issue as they arise. This additional time will help temper market fluctuations.

Thank you for the trust you place in Baker Boyer to protect and preserve your family legacies. You will be hearing updates from us as we continue to unravel the BREXIT puzzle.

Sincerely,

Mark H. Kajita

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