In geopolitics, it’s not just the fate of nations that often dangles by a gossamer thread: Faithful investors hang on for dear life, too. And it only took 1,270,000 British voters — less than the population of San Diego — to tip the balance toward leaving the European Union, kicking off a process that has frayed nerves in its wake.
You could argue investors should’ve seen it coming long ago. The term ” Brexit” actually dates to 2012, coined by Peter Wilding, an EU law wonk. Yet who could’ve predicted that the UK electorate would follow through in June 2016, or that British Prime Minister Theresa May would set their non-binding referendum into motion?
“If anything, I think that there has been a bit of an under-reaction to Brexit,” says Robert Salomon, associate professor of management at NYU School Stern School of Business and author of “Global Vision: How Companies Can Overcome the Pitfalls of Globalization.”
[See: 7 of the Best Stocks to Buy for 2018.]
Salomon says he “cannot put my finger on exactly why the market did not react more negatively, or at least inject more volatility after the Brexit vote. Perhaps they were discounting the likelihood of Brexit actually taking place — that is, assuming cooler heads would prevail down the road and reverse the decision.”
“There has been nothing like Brexit in modern history and this is a political problem, not one caused by the usual economic cycles,” says Dirk Schnitker, vice president of equity sales at Auerbach Grayson, headquartered in New York. “The normal analytical tools don’t work because a breakthrough or breakdown can happen at any time with huge positive or negative implications for the markets.”
So it’s not so much corporate executives, or even government regulators, but politicians calling the shots here — “and politicians will not tip their hand as to their real red lines,” Schnitker says.
Adding to the confusion: Not one but two Brexit options exist, and a range of possibilities between. At one pole, a “soft Brexit” would mean many years could pass — perhaps a decade — before Britain and the EU evolve into a new economic relationship.
“The political uncertainty that pertains in the U.K. is not conducive to the government making the bold policy choices necessary to provide clarity and stability,” says David Montgomery, partner at accounting firm EisnerAmper Ireland. “There’s also no clear view on what the EU wants to achieve. The combination of those factors could well result in a significant extension of the negotiating window, and for all parties, a longer-than-anticipated transition period.”
But at the other extreme, a ” hard Brexit” could mean that as early as late this year, Britain would sever all EU ties. And that possibility raises enough yellow flags to fill the proverbial changing of the guard at Buckingham Palace. Last February, Bain & Company forecast that a hard Brexit could reduce profits across industries by about 30 percent, or $4.07 billion.
[See: 6 Reasons to Love Apple Stock in 2018.]
Regardless of the path taken, the present isn’t exactly reassuring. “There seem to be no winners in the post-Brexit era,” says Christopher Ma, director of the George Investments Institute at Stetson University in DeLand Florida. He points to the 8 to 10 percent depreciation in the British pound and stock market turbulence following the Brexit vote.
And as U.S currency has gained value, “that’s a double jeopardy for U.S. multinational companies, such as Apple (Nasdaq: AAPL), Coca-Cola ( KO),General Electric ( GE), Deere ( DE), Nike ( NKE) and Caterpillar ( CAT).”
All that noted, Ma says U.S. trade with Britain amounts to just 3.8 percent of its export value. (By contrast, 19 percent of UK export value comes from American trade.) In the meantime, so much remains undecided that some argue it’s pointless to get worked up just yet.
“At this point, trying to predict which specific sectors of the economy will gain or lose because of Brexit is a fool’s game,” says Fran Burwell, senior advisor on the Europe team at McLarty Associates in the District of Coumbia, and a distinguished fellow at the Atlantic Council covering EU issues. “What we can say is that the only businesses that will be secure are those that operate entirely within the U.K., or between the U.K. and a non-EU partner such as the U.S.”
“I think Brexit concerns are overblown and that average investors shouldn’t give Brexit a second thought,” says Bob Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania. “I invoke the concept of a race when investing for the long haul. One should see building wealth as a marathon and not a series of sprints.”
Johnson’s observation calls to mind a salient point: News cycles are one thing, market cycles quite another.
[See: 8 Cheap ETFs to Build Your Nest Egg.]
“If one tunes in to one of the 24/7 financial news channels, that view is reinforced,” he says. “Talking heads instruct investors on how to trade in light of Brexit, the Trump tax plan, the French election and rising tensions on the Korean peninsula. Investors are instructed how to invest in light of the crisis de jour.”
More from U.S. News
7 Stocks Primed for an Amazon.com, Inc. (AMZN) Buyout
The Top 10 Investment Portfolio for Millennials
How Brexit Will Impact Investors originally appeared on usnews.com
