Category Archives: Brexit

more Brexit

June 27, 2016 By in Brexit, Uncategorized Tags: , , , , 2 Comments

–At the open in London last Friday, the first time UK stocks could react to the “Leave” vote on Brexit, the benchmark FT 100 index plunged by about 10%, to a low of 5788.  It spent the rest of the day recovering something more than half those losses.  Today, the index is inching lower again, something I suspect will eventually result in a test of the Friday lows.  If I were forced to make a bet, I’d say the index ultimately bounces off that low rather than falling further. During this time, the market will likely also reorient itself to favor beneficiaries of Brexit and penalize losers from it.

I’d prefer to stay on the sidelines and watch.

–To me, the more striking–and probably more permanent–feature of the market reaction to Brexit is the close to 10% fall in sterling that the “leave” vote has triggered.  This offsets some of the harm done to exporters by placing them outside the walls of the EU, and thus subjecting them to the extra costs of tariffs and regulatory red tape.  But it also means an immediate drop in the standard of living of ordinary citizens, by raising the price of imported food, clothing and fuel.  We can look to Japan, which is suffering from double the UK level of currency decline, for insights into what this implies.

–It’s already appearing that Brexit will be a less cut-and-dried affair than I had imagined.  There appears to be plenty of parliamentary room for following the letter of Leave while retaining the substance of Remain.  We’ll see.

–Post-vote polling shows not only strong pro-Remain sentiment in Scotland and most urban areas in the UK, but also a very large age difference in voting patterns.  Support for Leave was strong among those over 50, with those over 65 intensely in favor of exit from the EU.  Younger citizens were equally strongly in favor of Remain.  The actual voting tally implies that the former group was out in full force on Thursday, while about half the latter neglected to cast a vote.  …a cautionary tale for the US?

the UK is leaving the EU building

June 24, 2016 By in Brexit, EU financial crisis, Uncategorized Tags: , , , , Leave a comment

The UK voted yesterday, by a 52% -48% margin, to leave the European Union.

What does this mean?

As I’m finishing this, at 9:00 am edt, sterling is down by about 6% vs the US$ and the Financial Times 100 is off by around 4%–meaning a total 10% loss for the index in US$ terms so far in today’s trading.  The euro is off by 2% against the US$; the EUROSTOXX 50, an index of the largest EU equities, is down by close to 9%.

Pre-market trading in the US suggests an opening decline of about 3% for the S&P 500, which is better than the -5% decline of around midnight, when the voting results were first announced.

My thoughts:

–my guess is that there won’t be much deep reflection behind trading in the US today. It will be more knee-jerk reaction.  So there’s a chance to upgrade a portfolio by buying economically sensitive stocks that may be being sold for no other reason than because they’re typically more responsive to the general ups and downs of the overall market.

–today’s fall in the UK index–so far, anyway–just brings it back to where it was ten days ago

–the earliest that the UK/EU relationship can change is in two years, so there’s plenty of time for new economic ties between the UK and the rest of the EU to be established.  I have no idea what those may be like, so I see no reason to base buying/selling on hunches about those possibilities

—currency is my guess for the most important factor that has changed.  Weakness in the euro and in sterling is good for multinationals in Europe that have large non-Europe customer bases.  By default, the US$ and the yen are stronger, making the road for US and Japanese multinationals a little tougher (the main reason, I suspect, that Japanese stocks fell by 7% overnight)–and therefore domestic-oriented companies a bit more attractive.

–the main concern in continental Europe is that the UK leaving may have a snowball effect, making it more likely that, say, Greece will exit

–UK polls and UK betting houses were very wrong about a last-minute pro-EU shift by the electorate.  The UK equivalent of Trump supporters–losers in globalization, anti-immigration and suspicious of career politicians–turned out in unexpectedly high numbers to vote to leave the EU.  Poll failure in highly emotionally charged circumstances is no real surprise:  people who hold what the think are socially unacceptable positions are always loathe to reveal their true thoughts to pollsters.  There will doubtless be some carryover into US politics from the Brexit vote.  Whether this is comfort to the Trump camp or increased vigilance in the Hillary corner remains to be seen.

 

 

 

Brexit looming

June 16, 2016 By in Brexit, Uncategorized Tags: , , , , Leave a comment

Voting takes place a week from today in the UK on the question of whether the country should remain in the EU or leave.

If the vote is in favor of Brexit, the government will presumably inform Brussels of its intention to depart, which will start the clock on a two-year waiting period before Britain can officially withdraw.

Recent polls have begun to show for the first time that a majority of citizens favor severing ties with the EU.  This is the reason for recent weakness in London stocks.

My thoughts:

–polls on issues like this are notoriously unreliable.  Some are either tacitly or overtly political, with question design (on the order of “You do favor leaving the EU, don’t you?”) slanted to one side or the other.  As far as internet surveys go, it’s impossible to know whether the respondents are a representative sample of likely voters.  During in-person, and especially during phone, interviews, respondents often tend to be less than truthful, giving instead what they perceive to be expected responses

–Pro voters, who seem to think that exiting the EU will return Britain to its eighteenth-century glory, are delusional

–the two-year waiting period gives both sides time to renegotiate trade agreements (almost half of Britain’s exports are to the rest of the EU).  It’s reasonable, I think, to assume that new agreements will be less favorable than the current ones.  But it’s hard to know whether they’ll make a significant practical difference

–non-EU multinationals who have located operating divisions and general headquarters in the UK because of its being inside the EU will presumably begin to shift operations elsewhere (Ireland?)

–as far as portfolio investors like us are concerned, the main direct economic effect of Britain leaving the union will likely be the weakening of the currency that’s happening now.  So far there has been no counterbalancing positive movement by stocks where the costs incurred by the underlying companies are primarily in sterling but where revenues are in euros or dollars.  Such firms, however, should be star performers if the vote is for Brexit and as the currency stabilizes.

 

My conclusion:  prepare to buy multinationals traded in London on a further selloff that will likely occur if the vote next week is for Brexit.

thinking about Brexit

June 9, 2016 By in Brexit, EU financial crisis, Uncategorized Tags: , , Leave a comment

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.