The vote in the United Kingdom to exit the European Union has rattled the markets. In this post, we’ll discuss Brexit, touching on the economic implications and any changes to portfolio positioning.

What does the Brexit vote tell us about the future of Europe?

First, the populist surge in the United Kingdom is not specific to the United Kingdom. It is a global phenomenon that found a nexus on the back of immigration concerns with an inadvertent referendum and surprising Brexit outcome. The majority of voters in the U.K. elected to leave the European Union (EU) and neither the EU nor the U.K. prime minister (along with most of his cabinet) expected or wanted this outcome.

Second, to navigate as complicated an issue as Brexit, we must step back to understand and follow the incentives. This clarifies potential outcomes without inappropriately getting caught up in the details.

Third, in Greece, after the more combative negotiating strategy of Yanis Varoufakis, considerable political incentives emerged on the parts of Greece and “the institutions” to keep the European Monetary Union (EMU) together.

We see incentives for both the United Kingdom and the EU to defuse the situation. The EU has an incentive to keep the remaining 27 members together, best achieved through an outcome that does not give the United Kingdom preferential treatment or that is significantly detrimental to the EU, while involving more benefits and less cost to EU members than was previously the case.

At the same time, the EU also has an incentive to minimize the negative geopolitical uncertainty from a U.K. exit—the EU must at nearly all cost prevent emboldened populists and exit contagion to other member states. It remains to be seen how confrontational and antagonistic the exit process negotiations will be given these countervailing incentives. The formal exit process is unlikely to commence until outgoing U.K. Prime Minister David Cameron is replaced, which is not expected for at least three months.

Fourth, this entire process will be a long, uncertain slog. It is unlikely to evaporate in the near future.

Lastly, the referendum result ushers in considerable political uncertainty within the United Kingdom due to an increased probability that Scotland again seeks independence. The main U.K. opposition party has also suffered from the referendum outcome and may undergo an uncertain change of leadership and, thus, direction.

How might this affect financial markets?

In the long run, fundamental values are unlikely to be materially changed in European equity markets, including the United Kingdom. This must be kept in mind. Negative interest rate policies will be the norm over an inappropriately long term. All companies, financial institutions, and investors must adjust to this new reality.

Markets have moved to swiftly account for an increase in uncertainty, and higher volatility in equities and the British pound are likely to characterize the near-term future. The U.K. economy, which was reasonably strong prior to the referendum result, will be negatively affected and may experience recession. Fiscal consolidation that had been proceeding for a number of years may be temporarily halted and monetary policy is likely to remain accommodative.

U.K. equities are, in our view, priced substantially below their fundamental value. The economic and political headwinds mentioned above, however, offer the prospect of significant disruption to progress of prices moving toward their fundamental values.

Which asset classes may suffer?

Equities, particularly in the financial sector, are the most adversely affected by these developments. As noted previously, significant uncertainty has resulted in capital allocators demanding higher risk premia and this is likely already significantly priced in, but is unlikely to be “priced out” in short order.

Which ones may benefit?

U.K. government bonds are adversely affected by the political uncertainty but supported by being a relative U.K. safe haven, by expectation of intensifying disinflationary impulses, and by an accommodative monetary policy.

How may things play out from here?

A leadership contest for the Conservative Party appears to be the first development to get under way and is likely to be the first completed. Subsequently, invocation of Article 50 must occur before any U.K.-EU negotiations begin. While various EU leaders are pushing for this part of the process to begin as quickly as possible, responsibility for starting the formal exit process resides with the United Kingdom.

It remains to be seen whether the future U.K. prime minister will seek some form of “Brexit In Name Only” (“BRINO”), which would involve the United Kingdom remaining in the EU single market along with most or all of the conditions requiring alternative arrangements that would not threaten trade and capital flow and control cross-migration.

Germany is likely to be the key negotiator for the EU, as it led the various negotiations with Greece as a surrogate.

Populist Eurosceptic groups throughout the EU will be emboldened by the U.K. referendum outcome, provoking greater risk of other countries challenging their relationships with the bloc. Such groups are not likely to gain political power in other countries, but heading them off will be an incentive of incumbent EU country leaders.

How has portfolio positioning changed?

We entered the vote in a substantially de-risked posture across our strategies in assets and currencies vulnerable to a negative Brexit outcome. We were modestly short the British pound and long the Japanese yen, for example. This position has already been substantially unwound and we also took an opportunity to sell some overpriced volatility.

While we feel we are a big step closer to re-risking our strategies to take advantage of significant fundamental opportunities, we will wait until we see calmness and rationality in the marketplace.

Brian Singer is portfolio manager of the William Blair Macro Allocation Fund.