How Will Brexit Impact the Stock Market?
How can it influence U.S. investor portfolios?
The most prominent companies in the United States maintain business empires that go far beyond U.S. borders. In a global economy, few businesses are isolated from the fallout of an event like Brexit.
After years of negotiations, the United Kingdom officially left the European Union on January 31, 2020. That means a severing of ties between the U.K. and its closest trading partners. The economic ripples will go far beyond the price of French wine in London and Aston Martin cars in Barcelona.
Here Are 5 Post-Brexit Impacts on U.S. Investors, as I see it:
- Increased Commerce Costs
- More Cumbersome Transactions
- Disrupted Supply Chains
- Decreased U.S.–Europe Trade
- Employment Challenges
1. Increased Commerce Costs
Business done between the United Kingdom and the European Union (EU) is about to get more expensive. While the official Brexit date has already passed, negotiators are still working on a trade agreement between the two newly separated economies.
According to 2019 data from the International Monetary Fund, the United Kingdom is the sixth-largest economy in the world. There may be a host of new tariffs and increased hurdles to move goods and services between the U.K. and mainland Europe. Because many U.S.-based and -listed companies operate on both sides of the English Channel, it's reasonable to assume operating costs and tariffs will go up.
2. More Cumbersome Transactions
Membership in a trade bloc puts a fast lane on goods moving across borders. The fast lanes are all shutting down with Brexit, which means transactions between the U.K. and elsewhere may become slower and more cumbersome.
A loss of the existing trade agreements could subject some products to extra inspections, approvals, customs reviews and paperwork. That means more costs when moving products.
3. Disrupted Supply Chains
The United Kingdom is a strong economy with a colorful history. Due to a common language, it's a favorite trading partner for other English-speaking nations, notably the United States and Canada. Because goods and services going both into and out of the U.K. may be slower and more expensive, a ripple effect will likely impact the supply chains of many multinational corporations.
The most significant exports from the U.K. include cars, petroleum products, pharmaceuticals, turbines, diamonds and jewelry, aircraft parts, engines and other products. Because many other businesses rely on those vehicles, engines, parts and other exports for their businesses, disruptions are more likely than not to impact a large number of big and small businesses worldwide.
4. Decreased U.S.–Europe Trade
That common-language and trade bloc membership made England the fifth biggest destination for U.S.-produced products. Many products shipped to mainland Europe could make their way through the UK's essential shipping ports at some point. But with the lack of EU membership, these deals could fizzle.
In the best case, ships will just be redirected to France, Spain and other EU ports. But in some situations, the trade deals could fade away permanently. That's a potentially massive loss for U.S. exporters.
5. Employment Challenges
The United Kingdom already imposes substantial requirements for new immigrants. One of the driving forces for the pro-exit voters was cutting down on immigration from other parts of the EU and beyond. While some Brits may be happier with fewer immigrants around, the decision is sure to hurt hiring flexibility for European offices.
Before the Brexit, it was relatively easy for companies to hire workers from anywhere in the EU. But those easy employment visas may now be a thing of the past. That means hiring could be more expensive and more difficult. And as immigrants are a great way to fuel economic growth, we may see a slowdown on both sides of the split.
How to React to Brexit News
If you're thinking of clicking the buy or sell button, make sure to pause and consider the long term. At Investor Junkie, we're not fans of day trading. I personally prefer a long-term focus and a more passive investing strategy. That means I usually buy and hold a portfolio made up mostly of low-fee index funds.
I know that companies I own either directly in my stock portfolio or through a fund will likely see a temporary effect from Brexit. However, both the U.K. and EU countries will still want to trade with the United States. In the long term, Brexit shouldn't cause too much harm to either U.S.- or EU-based multinational corporations.
The stocks most likely to feel the brunt of Brexit are ones of companies headquartered in the United Kingdom. London is a major commerce hub and is home to the prestigious London Stock Exchange. LIBOR, the London Interbank Offered Rate, is a significant interest rate benchmark.
The list of companies with a lot of Brexit exposure is a long one. If you feel the risk is enough to remove them from your investments, you'll need to do some research.
Keep Your Eyes on the Bottom Line
There are very few investments today without some sort of global exposure. While you're almost sure to find UK- or EU-based companies in many international stock funds, virtually all significant corporations will feel at least a little bit of pain from Brexit.
It may take years to know the full effect, but you can catch a glimpse by looking at the earnings reports of major stocks in your portfolio. Many companies break down earnings by region, so it's easy to see how Europe is performing. But as we discussed, the effects could reach far beyond European borders.
While much of the downside is already priced into the stock market, there's always a chance of new surprises in the post-Brexit economy. With eyes focused on your portfolio and the underlying companies, you are in the best position to weather the storm.