thinking about Brexit

In two weeks, on the 23rd, the UK will vote on whether to remain in the EU or leave.  Polls show that the leave forces, which were once in the minority, have pulled to just about neck and neck with the remain camp.  One caveat:  I don’t know enough about the national mood in the UK to have a view about whether citizens are likely to reveal their true intentions to pollsters, which is always an issue with controversial topics.  My sense is the leave camp is populated with the same left-behind-by-globalization people as in the rest of the world, who dream that a return to a semi-mythical isolationist past will solve all their problems.

Britain has never been in favor of the ultimate “United States of Europe” destination for the EU project, which imagines an ever-closer union to mimic, and counter, the political/economic power of the US.  Because of this, some have argued (incorrectly, in my view) that a vote to leave will be a long-term political plus.

As investors, though, our task in understanding the implications of a possible Brexit is simpler:  what are the implications of Brexit for publicly traded firms doing business in the UK?

I see two, both negative:

–over the course of the past decades, many non-EU multinationals have decided to make the UK their base of EU operations.  The UK offers a large potential workforce, English as the national language and a legal system less strongly tilted to favor locals than is the case elsewhere in the union.  Also, of course, being inside the EU frontier, the UK is not subject to the tariff and red tape barriers that outsiders might face.

A “leave” vote on Brexit eliminates this last advantage.  At the very least, a period of uncertainty would follow until new trade, travel…agreements are negotiated.  These are unlikely to make the lot of the UK better–the question is how much worst things will be.  For companies without extensive manufacturing in the UK, the best solution may be not to wait but to decamp to, say, Ireland as fast as possible.

–the UK is by a mile the financial capital of the EU.  Same reasons as for multinationals in general.  In addition, the UK pursued a “regulation lite” policy to lure financial firms to its shores in the runup to the banking collapse of almost a decade ago.  (One result of that regrettable policy is that much of the highly unethical behavior of US and foreign banks that led to the financial meltdown, and which would have been against the law elsewhere, was technically ok in the UK.)  Post-Brexit, these firms would be on the outside looking in.  New EU banking policies would determine their fate.


My overall guess is that the UK leaving the EU would be bad economically for both sides–although the effect might well be lost in the general malaise (aging populations, generally weak government finances, hometown-favoring legal systems) that characterizes the EU today.  Subsequent action by EU policy makers to favor, or not, exports from the UK (which make up almost half of Britain’s total exports) will determine how badly UK-based multinationals will be hurt.  In the meantime, absent large falls in their stock prices (my guess is that 10% declines, a figure I plucked out of the air, will be the norm), I don’t imagine the firms in question will be drawing much favorable investor interest.

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