Brexit Investor Sentiment

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British voters have shocked financial markets on Friday by choosing to have the United Kingdom exit the European Union.

So far, the “Brexit” vote is creating global market turmoil and in the medium term it may trigger a global recession, although its most significant and prolonged impact will be on Britain’s economy.

Investors should expect persistent volatility and weaker returns due to market uncertainty. On Friday, many market players have instantly opted to move assets into gold holdings which are perceived as a safe haven in times of uncertainity.

At present, economists are attempting to determine the long-term implications of the Brexit vote for the UK and EU economies.

Moody’s maintains its Aa1 rating on the U.K.’s sovereign debt but cuts its outlook to negative from stable, saying the country’s vote to leave the European Union will usher in a period of uncertainty with negative implications for medium-term growth. The ratings agency affirms the EU’s AAA rating and stable outlook, saying the U.K.’s move should not alter the capacity or the willingness of the highly rated members to continue to honor their obligations to support the EU.

Looking forward, much will depend on whether the negotiations between the UK and the EU are amicable or contentious. Under Article 50 of the EU Treaty, Britain has two years to negotiate the terms of its exit from the EU, though many analysts believe it will take much longer.

The current market momentum is mostly driven by the reaction to the referendum.

There are several consecuences investors need to consider:

Most likely, the effect of Brexit will not result in a global crisis akin to 2008. The financial crisis of 2008 was driven by a massive and widespread deleveraging process that began with the U.S. consumer and extended to the global banking system. There is simply not enough leverage in the global financial system for that to transpire.

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