Brexit fallout: U.K. vote could hurt Wisconsin businesses

The market chaos that ensued last week after people in the United Kingdom voted to exit the European Union has subsided, but that doesn’t mean the global economy is completely out of the woods.

Some have described the referendum vote, which is actually nonbinding for the U.K. Parliament, as an earthquake that shook the concept of globalism to its core. The “Brexit” has been attributed to concern that EU officials in Brussels have more control over immigration than British citizens, but post-vote regret has some wondering whether Parliament will actually follow through and vote to leave the EU.

Nathan Brinkman

“Some people are regretting their initial decision,” notes Nathan Brinkman, president of Triumph Wealth Management in Madison. “This is leading to an interesting drama and we have front-row seats.”

Act II

One aspect of that drama is that some in England are looking on the economic bright side. Before markets here and overseas began to steady, the Brexit-inspired market slide wiped out $3.5 trillion in global investment value and sent the value of the British pound sliding versus the American dollar.

Sara Walker

If that persists, it’s bad news for Wisconsin manufacturers that export, says Sara Walker, senior vice president, senior portfolio manager, and chief economist for Associated Bank. In 2015 the U.K. was Wisconsin’s fourth largest trading partner with $824 million in exports, or 3.7% of the state’s total exports.

The dollar already has been gaining in strength, which makes American products more expensive overseas. If the weakness of the British pound continues against the dollar, which is considered to be a safe-haven currency, “that will hurt our economy because we still are a state economy of manufacturing and we export,” Walker states.

“Interestingly, already there are articles mentioning the pluses to the U.K.’s manufacturers and specifically their exporters because the pound has weakened so much. Rising out of the rubble is this thought that, ‘well, they have trouble over in the U.K., but the pound is so cheap that their exporters are going to see a tremendous benefit.’”

“Especially affected will be foreign companies involved whose main exports are between Great Britain and the Eurozone,” Brinkman adds. “European and especially British banks will be and have been heavily affected by the speculation or even likelihood of the Bank of England having to reduce its rate, compressing the available spread range for banks.” 

Cooler heads prevail

Whatever ensues, investors and professionals with 401(k) accounts should always take the long view and not panic by taking money out of the market. There are some good buying opportunities during any volatile period, and those who remain invested have rarely regretted the long-term results.

“What we’ve seen in the past few days highlights the importance of keeping a long-term view when one is thinking about and making decisions about his or her long-term portfolios,” Walker says. “I know that sounds like a bit of a cop-out, but I’ve seen it with the numbers.”

Financial losses, even on paper, are never comforting to anyone, but when you take a longer-term view it puts things in perspective, Walker adds. “There are always going to been these ebbs and flows, and yet over time we have such a wonderful opportunity to participate in economic growth through the stock market that you tend to be able to sail through these worrisome times.

“It’s not perfect and it’s not easy, but taking that long-term view helps an investor remain steady with his or her approach, and that goes a long way toward investment success.”

(Continued)

 

Nevertheless, if Brexit concerns resurface and the urge to leave the EU spreads across Europe, U.S. investors will need to pay attention to the resulting disintegration. While Brexit remorse has tamped down talk of such a “contagion,” the EU’s stance appears to favor allowing the U.K.’s exit process to proceed so that further uncertainty can be avoided. In a nod to the reality of the Brexit vote, British Prime Minister David Cameron has promised to resign and he has encouraged Labour Party Leader Jeremy Corbyn, who lost a no-confidence vote by his fellow lawmakers, to follow suit.

Thus far Corbyn has refused to leave but the EU apparently believes lingering uncertainty would create a bad environment for capital markets. “I believe the EU is seeing the pluses, the upside of ‘alright, if you are going to leave, then let’s move on quickly’ because it would be a better recovery for them,” Walker says.

Walker believes exit contagion would increase barriers to trade and would result in less of an open economy in Europe, which would not promote economic growth.

Given the opportunities for investment even in a chaotic market, any further slide among publicly traded companies could benefit privately held companies, according to Bronwyn Bailey, vice president of research and investor relations for the American Investment Council. “Publicly held companies are typically the comparables used to price private companies,” she notes. “As the value of the public companies goes down, that means the price of the private companies would also go down. You always want to buy low and sell high, and so more private companies would look appealing to private-equity investors.”

Soft-target terror

In the immediate aftermath of the terror attack at the airport in Istanbul, Turkey, the Dow Jones Industrial Average was up 236 points, which points to a pattern when it comes to so-called “soft-target” attacks. Unlike the spectacular Sept. 11 attacks, which sent the stock market reeling, these smaller-scale attacks in Paris, Brussels, San Bernardino, and Orlando have had a negligible impact on both the stock and capital markets.

There is a longer-term impact in terms of the economic drag caused by the cost of protecting against such attacks, but when it comes to terror attacks and mass shootings, “We’re getting immune to it,” Walker says with a degree of sadness.

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