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Brexit: Should Investors Be Worried?

British flagsAs an investor with assets primarily in the United States, you are probably weary of following the trials and tribulations of the Brexit drama in the United Kingdom. Since the British electorate voted back in June 2016 to withdraw from the European Union, negotiators for both sides have worked feverishly to address the will of the people without undue damage to economic activity and global trade. Perhaps second only to the Mueller investigation in the US, the amount of ink spilled following this drama has been unending, and the range of outcomes subject to wide speculation. As the deadline looms, should we be worried about the economic fallout from a so-called “hard Brexit”?

As of this writing, it appears that Parliament is set to extend the deadline for Britain’s exit from the EU past the original March 29 date. While that will create more breathing room to agree on a deal, the path forward remains highly uncertain. Parliament seems to be united in their opposition to leaving the EU without a deal, but they can’t seem to agree on what a new deal should look like.

The consensus among most observers centers around the two most likely outcomes: (1) an extension of the deadline with time to work out a “soft-Brexit” deal that avoids most of the trade bottlenecks and disruptions that are likely to occur without a deal, or (2) a second referendum with British voters to reconfirm their preference for an exit from the UK. The probability of a no-deal hard Brexit is estimated to be less than 20% by many observers.

Even in the event of a hard Brexit, the impact on the global economy is likely to be minimal. While prolonged uncertainty would not be good for business or financial market sentiment, the implications for other countries is probably not too severe. A break from the EU would require the UK to renegotiate trade agreements with nearly 100 separate countries, according to Capital Economics1.

While the imposition of new tariffs on British imports would be damaging to certain countries and industries that rely on exports to the UK, the UK accounts for only about 4% of world goods trade and less than 3% for most countries. So the impact on global trade is likely to be manageable.
Of greater concern to financial markets is a broad based slowdown in global growth. Recent economic data reflects a decidedly mixed bag. A measure of global manufacturing activity in February fell to its lowest level since June 2016, and just slightly above contractionary territory. This indicator has declined for 10 straight months, the longest streak since December 2008.
At the same time, the global activity measure for services, more important than manufacturing in the developed world, rose smartly. Other economic data points reflect some stabilization and improvement relative to diminished expectations. The US economy remains on a well-telegraphed slowdown in growth from last year’s torrid pace, but with no signs of contraction.
In short, investors should be paying closer attention to the strength of the global economy than the ebb and flow of the Brexit negotiations. On that score, the signs are more hopeful.

1 Capital Economics, Global Economics Update, March 13, 2019.

Learn more about Bruce Simon, our Director of Research.

 

 

Brexit - Should Investors Be Worried?
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