Months after voters in the U.K. decided by referendum that their country should withdraw from the European Union, Prime Minister Theresa May has triggered Article 50 to formally depart from the economic and political partnership in 2019.
And while the die is irrevocably cast — Article 50 cannot be withdrawn without unanimous consent of the other 27 EU members — the implications for investors and global financial markets may not be as bad as once feared. And there’s money to be had for those who can make the right moves.
A monumental task. Brexit is a monumental change that will require London to renegotiate everything from immigration, border controls, visa restrictions and trade. Britain is the first country to ever leave the EU, so the process is loaded with uncertainty. It’s that lack of clarity about how the negotiated exit will turn out that is making many investors nervous.
[Read: After Brexit, Investors Should Keep Calm and Carry On.]
“It involves [untangling] the biggest plate of spaghetti in the world and putting it back together,” says Jonathan Gibbs, an investment specialist at Standard Life Investments in Edinburgh, Scotland.
The U.K. economy is intertwined in a way that is similar to the connectedness of the economies of U.S. states. The way goods are made involves work in many countries, just as goods made in the U.S. are often assembled across state lines.
Trade flowed freely between Britain and other EU countries and how that continues needs to be negotiated in a way that will be agreeable to all each government as well as the businesses that have come to rely on the free movement of labor and materials.
“Triggering the article triggers uncertainty and uncertainty triggers nervousness,” says Stephen Wood, chief market strategist at Russell Investments in New York. “We are aware that this is a two-year long negotiation process that will have winners and losers.”
The good news is that much of the uncertainty is expected. It’s the equivalent of bracing yourself for some jolting when a New York subway car brakes. You know if you don’t hold onto a handrail you could fall over.
In the case of Brexit, there will no doubt be a lot of bracing.
“In general, we have chosen to look past the uncertainty,” says Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management Co. in Milwaukee. “I don’t buy into that people believe that this is a tragic event for the U.K. Certainly they were getting some benefits from the EU and there will be some benefits from new deals.”
The U.K. isn’t economically finished because of the Brexit. And neither is mainland Europe.
Why buying Europe makes sense. Schutte points out that Europe is home to world-class companies that have the skill to make lots of money for investors. And in the end, that’s why anyone invests in a stock — because they believe the company can make a profit.
Europe still presents great opportunities for investors, particularly the countries that will remain inside the European Union, Schutte says.
[Read: 9 Ways to Invest in British Stocks, Despite Brexit.]
Overall there are some very high-quality companies in both Britain and mainland Europe. Still, he favors mainland Europe over Britain because of where the eurozone is in the economic recovery process. The eurozone comprises the countries that use the euro as their currency.
The countries that use the euro have not recovered from the wealth-withering effects of the financial crisis as fast as the U.S. or Britain. Germany, France, Spain and the other eurozone member countries are still early in the economic cycle.
Historically, the gains in the economy and hence the gains in profits tend to be larger early in the cycle. If that relationship continues to hold investors should expect faster earnings growth in mainland Europe than in the U.K. or the U.S.
And European stocks are cheaper than U.S. stocks in terms of the price paid for shares relative to earnings of the companies. When you combine the economic cycle with the valuation it could be good news for investors.
The result should “equal some sort outperformance over the next 12 to 18 months,” Schutte says.
What to buy? Investors interested in European stocks might want to consider the following no-load mutual funds:
— T. Rowe Price European Stock Fund (ticker: PRESX). It has annual expenses of 0.96 percent or $96 per $10,000 invested.
— Invesco European Growth Y (ticker: AEDYX). It has annual expenses of 1.09 percent or $109 per $10,000 invested.
— JPMorgan Intrepid European Select (ticker: JFESX). It has annual expenses of 1.1 percent or $110 per $10,000 invested.
[See: The Best Energy Stocks to Buy for 2017.]
Alternatively, there is the Vanguard FTSE Europe (ticker: VGK) exchange-traded fund that has annual expenses of 0.1 percent or $10 per $10,000 invested. Buyers of the ETF will also incur the commission costs of buying and selling as they would with individual stocks.
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What Triggering Article 50 Means for Brexit and Investors originally appeared on usnews.com
