Britain’s vote to leave the European Union has brought on an indefinite period of economic uncertainty and people are underestimating the time it will take to negotiate this complicated divorce, says Franklin Templeton's Philippe Brugère-Trélat.
If a nation wishes to leave the EU, it must follow the five point plan of Article 50 of The Lisbon Treaty. Once the law is triggered the UK has two year period to negotiate its terms of exit with all 27 remaining members of the EU, but Templeton's Brugère-Trélat is pessimistic about that timeline.
'[Negotiations] will likely take a long time,' he said. 'The EU treaty provides for a period of two years, but I think it will likely take much longer. More than 80,000 pages of treaties incorporated over time into UK law will need to be looked at one by one.'
A longer period of negotiation brings with it additional risks and he said the success of Brexit depends on whether the EU the UK can end things cordially.
‘In my view, the EU has little reason to make it easy for the United Kingdom to create a dangerous precedent,’ said Brugère-Trélat, who runs the Franklin Mutual European fund. ‘So we likely face a prolonged period of uncertainty that will weigh on markets globally.’
Financials and domestically-oriented cyclical stocks will be the most affected areas of the UK and EU equity markets, Brugère-Trélat said. He added that the capricious market gives investors a chance to seek opportunity in more defensive and higher-yielding areas of the market.
‘We remain cautious as there is, at present, little clarity as to how this situation will evolve.’ he said. ‘However, we also stand ready to take advantage of the volatility by seeking out high-quality companies with solid balance sheets and good cash flow that may become unduly caught up in the general market panic.’
Brugère-Trélat said the long-term consequences of Brexit are hard to assess. Even so, he predicts the expansion of sovereign credit spreads in Europe, an upsurge in the ‘already-high’ risk premium of European equities, and that the greatest challenge will be the political risk of other European nations trying to leave the EU.
Since the UK is still the second largest economy in Europe with many strong global companies, he said, the decision to leave is not a complete disaster.
‘While the recent market turmoil may be troubling, it’s not the end of the world.’