the UK is leaving the EU building

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

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.