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Does the EU’s ‘existential moment’ threaten your investments?

Some believe the European Union (EU) is up against the ropes with its very existence as an institution under threat.

Former Belgian prime minister Guy Verhofstadt reckons the EU could “disappear”  and faces an “existential moment“. He reportedly told the BBC World Service recently that he thinks many populist movements are putting the EU under pressure to reform.

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I think Mr Verhofstadt’s opinion matters because he is the EU’s chief negotiator for Brexit in the coming negotiations. Surely none could be more pro-EU than a man in his position. If he thinks the game may be over soon, I reckon we should listen.

What will happen to shares?

Mr Verhofstadt  is also head of the Liberal and Democratic Alliance in the EU and must be intimately acquainted with the pulse of the EU as an institution. He no doubt knows a threat hurtling inwards when he sees one.

Right now he’s concerned about many factors that he sees challenging the European project, such as Britain leaving the EU; the foreign policies of Donald Trump and Vladimir Putin; the threat of jihadism; and an upsurge in nationalism and other populist political movements. 

The message seems to be that the EU must reform or die. That idea strikes me as something that many have believed for years. However, such a view hits me harder when I hear it coming from deep within the ranks of the organisation’s movers and shakers.

I reckon the most likely outcome over the coming years is that the EU will die and the vacuum left when the implosion occurs will suck in something better to replace it. But whatever happens, I think the political and economic road ahead in Europe is set to get bumpy and a turbulent political and economic landscape will likely lead to one prominent outcome on stock markets — volatility.

Should we run for the hills?

Maybe I should sell all my shares and plough the proceeds into shotguns, tinned beans and horses so that I can gallop off and hole out somewhere safe when the EU-less dystopian future arrives?

I don’t think so. Even if the EU fails and breaks up, economic activity will carry on because nations have a need, and a will, to trade with each other. Yes, we will likely see volatility on stock markets, perhaps along the lines of what we saw in the aftermath of Britain’s vote to leave the EU. But economic activity will continue. Companies will carry on trading, growing and paying dividends to investors.

Warren Buffett and other well-known successful investors typically pay little attention to macroeconomic and political events, preferring instead to concentrate on the news flowing from their investee companies. I think that’s the way ahead, even in the face of potential economic events such as the break-up of the EU.

We should focus on stocks with good quality underlying businesses and decent forward prospects, and hold their shares for the long haul. That way, any weakness in the stock market because of economic and political trauma is probably best viewed as an opportunity to buy rather than as a reason to flee from investing.

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