Will Brexit Take the Market Down? Only in the Short Term.
1) Odds are UK stays. If it stays markets should stay stable or move up incrementally.
2) If UK exits, equity markets could sell down 5%-20% peak to trough.
3) The real economic impact to the US is likely very small, bordering on irrelevant.
4) My current view is that markets should recover very quickly, in 60 days or less as long as the US isn’t driven into recession by non-Brexit factors.
5) If Brexit does occur, at this point it should be viewed as a buying opportunity particularly in certain US sectors and high quality stocks.
For those that don’t know what the Brexit is, the United Kingdom is holding a referendum vote June 23 on whether to stay in the European Union. Policy makers and investors from Janet Yellen to George Soros have held forth on the impact of Britain leaving the EU and nearly unanimously warn markets are likely to have a strong “risk off” reaction if Britain leaves.
In English, that means that our talking heads expect the markets to sell off substantially if the United Kingdom bails on the EU.
Estimates for the market turbulence range from -5% down to as much as -20%.
The first thing to consider is that it’s always to important to invest based on what IS and not what IF.
Odds are Britain will remain in the EU. But even if it doesn’t, the actual economic impact in the US is likely to be small, and probably very small. The British Economy makes up approximately 2.4% of World Gross Domestic Product versus the United States at 17% – 20%. The US exported approximately $117 billion in goods and services to the United Kingdom in 2014. To put that in perspective, US Exports for 2014 totaled about $2.35 Trillion. Exports to Britain account for approximately 5% of US export trade.
In 2014, US GDP was $17.9 Trillion, so British exports accounted for approximately 0.65% of the US economy. Some experts predict the British economy may see a contraction as large as 6%. Without taking into consideration potential currency impact on US trade as a result of the impact we could estimate a “worst” case scenario of a 12% reduction in US exports to Britain, or about -$14 Billion in lost exports. In this aggressive illustration, US GDP would see an impact of approximately -0.06% based on 2014 numbers, the most recent available.
To put this in perspective, Apple had $53 Billion in net income last year. If Apple only made $39 billion next year (or the year after) would it take down the US economy? No. Neither will a Brexit.
What is a bit more difficult to quantify is the impact a Brexit might have on US multinationals with large operations in the UK, particularly in the banking sector. However, even a 6%-12% contraction in UK banking revenue is unlikely to do any lasting damage to the major banks and is most likely to express itself as a mild dip in earnings for the next 2 quarters as US banks with British exposure restructure around the new reality.
A mild dip in banking sector earnings is nothing new, and unlikely to cause a recession or have any other lasting impact in the US.
Let’s not forget how often policy makers and talking heads have been wrong in the past. It may be that regaining Sovereignty will allow Britain to more aggressively sign favorable trade agreements that boost her economy while reducing both the drain in dollars paid to the EU for membership and unwanted immigrants that appear reluctant to integrate and place an additional load on the UK social system.
Given the above, any sell down as a result of a Brexit should be viewed as a buying opportunity absent recessionary weakness in the US.
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To Smarter Investing,
Chief Market Strategist
ACI Wealth Advisors, LLC.
Process Portfolios, LLC.