Imagine for a moment that on March 29, 2019 the US government installed a hard border between Connecticut and the rest of the USA. Maybe not a big deal for us living in Albany, but what if you commuted daily from Connecticut to NYC for work. What if you had a business in Connecticut that conducted a lot of work in New York and now there was a tariff on all of your work. Your business would no longer be competitive in New York and your business would likely fail.
Last week I was in Northern Ireland as the British Parliament battled with Britain’s Prime Minister May regarding Brexit, which in effect would require a hard border between Northern Ireland as part of the United Kingdom (UK) and the Republic of Ireland which would remain part of the European Union (EU). Roughly 20% of imports to Britain flow through the Republic of Ireland. As you might expect, the consequences of Brexit have far reaching implications on the finances and daily life for people living in the Republic and in Northern Ireland. My colleagues in Northern Ireland who would align themselves with the Labour Party are generally opposed to Brexit.
Imagine with me for a moment that American laws, treaties and trade agreements were dictated by an alliance of countries including Mexico, Canada, Venezuela and Belize. The alliance would dictate immigration policies, trade policies, monetary policies, taxes and laws for the United States. This is how my colleagues in London (predominantly Conservative Party members) feel about the EU. They are generally in favor of Brexit due to concerns about the instability of the European Union, and Britain’s loss of sovereignty as the EU imposes regulations on the UK.
Visiting friends in both Northern Ireland and London over the past week gave me a glimpse of how raw and divided emotions and ideologies are on the issue of Brexit. I realize that the two scenarios that I have painted provide an over simplification of the Brexit issues, but since most Americans understand very little about Brexit, I feel it provides a good summary to start understanding the two sides. Americans, both citizens and congress are divided politically but not nearly as divided as voters and members of parliament are in the UK. The consequences of America’s political division may seem overwhelming but the immediate consequences pale in comparison to the implications of Brexit in the UK.
March 29, 2019 is the deadline set for Brexit and so far the British Parliament has rejected twice deals which Prime Minister has negotiated with the EU. If Parliament cannot agree on a deal with the EU (highly unlikely), or get the EU to agree to a deadline extension (possible), or parliament and the EU agree to some other not yet determined solution, (unknown) then Brexit will occur on March 29thand the UK will no longer be a member of the EU. The UK would revert to World Trade Organization rules on trade. There are 1.3 million British citizens in EU countries and 3.7 million Europeans in Britain – their rights to live and work would be unclear.
So what are the implications of the Brexit turmoil to US investors?
Two years ago, on June 15, 2016, I was in London the day before the initial Brexit vote. At that time, I had the ability to assess the sentiment and attitudes of UK citizens and their uncompromisable division. Nothing has really changed. The day after the Brexit vote on June 16, 2016, the Dow fell 610.32 points. Currency markets were also in turmoil. The euro fell 2 percent to $1.11. The pound fell. Both increased the value of the dollar. That strength is not good for U.S. stock markets. It makes American shares more expensive for foreign investors. As a result, gold prices rose 6 percent from $1,255 to $1,330.
A weak pound also makes U.S. exports to the U.K. more expensive. It affects the U.S. farming and manufacturing sectors. The U.K. is America's fourth-largest export market. Brexit dampens business growth for companies that operate in Europe. U.S. businesses are the most significant investors in Great Britain. U.S. companies invested $588 billion and employ more than a million people in the UK. These companies use it as the gateway to free trade with the 28 EU nations. Many have opened subsidiaries elsewhere in Europe to protect against a hard Brexit or no deal but man other US companies are not prepared.
Likewise, Britain's investment in the United States is at the same level. Brexit could impact up to 2 million U.S. based British jobs. It's unknown exactly how many are held by U.S. citizens but the uncertainty over their future will dampen growth.
Brexit is a vote against globalization. It takes the United Kingdom off the main stage of the financial world. It creates uncertainty throughout the U.K. as London seeks to keep its international clients. U.S. stability means London's loss could be New York's gain.
At Simmons Capital Group, we will continue to monitor Brexit and many other international affairs that can influence our client’s portfolios. We make our portfolio decisions based on a combination of intensive research from the USA combined with first hand knowledge and communication overseas. In the coming months I will be in Romania at a conference of business people from across the EU. I will be visiting several economic development projects and simultaneously gathering information about the instability between Ukraine and Russia. I will also be at meetings in Cyprus with colleagues from Turkey and other Middle Eastern countries so that I can assess the geopolitical and economic risk in the Middle East and the implications for US markets.
Thank you for the confidence and trust that you have placed in the Simmons Capital Group team. We will continue to work hard to earn your confidence through honest, objective and internationally informed advice. Please feel free to call the office at 518-406-5624 if you have questions or if you would like to schedule a meeting to review your accounts. Please feel free to share our commentary and contact information with friends or colleagues or family who are seeking world class financial advice.
Donald E. Simmons, CFP®
The views expressed represent the opinions of Simmons Capital Group and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.