Summary
- Whether an exit agreement is undertaken or the no-deal scenario will happen, Brexit has significantly impacted the UK economy.
- The sterling slumped following the announcement of the referendum results and has only shown slight recovery three years since.
- Brexit will not only bring disruption to the UK and Europe but will have a ripple effect to the US economy with the European Union being the largest trading partner.
- Looking for a helping hand in the market? Members of The Lead-Lag Report get exclusive ideas and guidance to navigate any climate. Get started today »
Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little. – Fred Schwed Jr.
More than three years have passed since the Brexit vote won by a slim margin during the 2016 UK referendum. Brexit’s original due date was set on 29 March 2019, two years after Prime Minister Theresa May triggered Article 50, but the deadline has been pushed back twice even leading to May’s resignation. UK's new PM, Prime Minister Boris Johnson, promises that the UK will leave EU by the end of October 2019 intensifying speculations of a no-deal Brexit. In a no-deal scenario, the UK will leave the EU without a formal agreement of the separation process. The rules that governed the UK and EU relationship for 50 years will disappear overnight without a replacement. No deal on the Irish border, no agreement on the rights of UK citizens in EU and EU citizens in the UK, no deal on the money UK is supposed to pay to the EU, and no provision for a Brexit transition period.
Much anticipation and predictions are being made as to how Brexit will come to pass but far less focus on what the negotiations are doing now to the financial markets. Whether an exit agreement is undertaken or the no-deal scenario will happen, Brexit has significantly impacted the UK economy. The sterling slumped following the announcement of the referendum results and has only shown slight recovery three years since. A study conducted by the Centre for European Reform estimated that the UK economy is 2.9 percent smaller than it would be if the UK had voted to remain in the EU This translates to almost £70 Billion of Brexit Costs. The final withdrawal will cause greater shock to the markets with a high risk of recession.
Figure 1. GBP/USD 5Y Chart
Source: Trading View
Figure 2. UK economy with Brexit vs UK economy without Brexit
Even without direct UK exposure, US investors should be wary of the Brexit effect. Brexit will not only bring disruption to the UK and Europe but will have a ripple effect to the US economy with the European Union being the largest trading partner of the US. Large US companies have the most significant influence on benchmarks and Europe is an essential market for these companies. The Lead-Lag Report provides an in-depth assessment of these geopolitical factors.
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Author Bio:
This article was written by Michael A. Gayed. An author on Seeking Alpha and founder of the Lead Lag Report.
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