5. The British pound will be a policy tool
Compared with the central banks of other European countries, the Bank of England is in a relatively good position. There's a big difference between the U.K. leaving the EU rather than France or Spain. That’s because the U.K. has its own currency, the British pound, unlike many of the EU’s members, who share a common currency, the euro. Britain’s pound is critical as an adjustment tool to absorb a shock like Brexit. It has already fallen significantly, and recent statements from the Bank of England imply they are comfortable with this lower level.

6. The banking system will be tested
Threat to the financial system is one of the ways a geopolitical event can have ripple effects throughout markets. The question is, can the European banking system stand up to this disruption?  In the end I think it will be fine, but initially it is the area that will take the most impact. However, unlike in 2008 the U.K. and U.S. banking systems are significantly well-capitalized and have passed strenuous stress tests. In fact, the Federal Reserve recently announced that all 33 strategically important U.S. banks passed their stress tests. Therefore, global banking contagion is highly unlikely.

One of the challenges we face is that the European banking system may not be quite as well-capitalized as it needs to be. Central banks can take care of liquidity, but some EU banks will need to find ways to recapitalize through the markets. So, while the U.S. and U.K. banking systems are strong, central European banks are where my concern is focused.

7. Rest easier knowing institutions were prepared
When it comes to events like the U.K. referendum, the accuracy of predictions isn’t nearly as important as being prepared for both outcomes. While the vote to leave was a surprise to most, the fact that institutions like the Bank of England and the European Central Bank (ECB) were prepared for either outcome has helped calm the financial markets.

This is one of the great lessons of the global financial crisis. I am very impressed by the speed and magnitude of central bank action in repose to the U.K. referendum. The ECB has already made a statement of what it's going to do, as have the Bank of England, the Bank of Japan, the Bank of China and the Fed.

Bottom line: This is not a time to panic. Four key factors will aid in our ability to weather the UK referendum vote: adequate time to reflect and respond to the upcoming changes; the speed at which the central banks have moved; the U.K.’s independent currency as an adjustment factor; and the lessons from the global crisis.

Colin Moore is global chief investment officer at Columbia Threadneedle Investments.

First « 1 2 » Next