If You Think American Stocks Are Safe From Brexit… Think Again

5 | By Shah Gilani

We’re down to the wire. Tomorrow’s the day the U.K. decides on whether or not to stay in the European Union.

If Britain decides to exit, British and European markets are going to sell off hard – that’s a given. And that could be just the beginning of trouble across the pond.

And make no mistake – the implications of a Brexit are going to be global. That means American stocks won’t be far behind. In fact, some could tumble end-over-end.

That’s because lots of big American multinationals generate tons of revenue from British and European operations, and sell huge quantities of goods and services there.

Here’s how earnings will be affected by a Brexit – and which stocks are most vulnerable…

The “Gateway” to Europe

Great Britain generates billions of dollars of revenues for American multinationals.

According to a recent Bank of America research piece by Joseph Quinlan, Managing Director and Chief Market Strategist at BoA’s U.S. Trust Private Wealth Management unit, since 2000, U.S. multinationals have generated 9% of their global foreign affiliates’ profits from the U.K.

Output of U.S. affiliates in the U.K. was $153 billion in 2013 alone.

U.S. corporations invested $588 billion in the U.K. in 2014. That’s double what they invested in South America, the Middle East and Africa combined, says Quinlan.

Besides Britain being a destination for investment and American companies’ goods and services, it’s also a gateway to the rest of Europe for America’s biggest companies.

John Manley, chief equity strategist at Wells Fargo Funds Management, says American firms, “use Britain as sort of the shoehorn into the continent.”

That makes sense because of the ties so many multinationals have had to Great Britain since long before the European Union came into being.

The E.U. is the world’s largest trading bloc, responsible for 16.9% of global GDP, based on purchasing power parity (PPP). The U.S., if it were considered to be a bloc, would be second to the E.U., generating 15.8% of the world’s GDP, according to the IMF.

So the ties between Great Britain, the European Union, and the U.S. are very important.

But those ties could be severely stressed, in terms of market reaction, in the event of a Brexit from the E.U.

Interconnected business relationships will be exposed to potentially devastating credit market gyrations and what George Soros says could end up being a 20% devaluation of the pound sterling. Over the past year, the pound is down 10% against the dollar, with 5% of that drop coming since January 2016.

A further depreciating pound would have immediate knock-on effects on the euro, possibly knocking it down 10% or more.

These currency hits put U.S. multinationals in the direct line of fire.

Companies generating revenue in the U.K. and across the E.U. would suffer huge earnings hits if they have to translate their overseas earnings and profits back into U.S. dollars, which ends up costing them dearly when it takes billions more devalued pounds and euros to buy what would be relatively more expensive U.S. dollars.

With S&P 500 earnings approaching three-year lows, even as markets near record highs, any hard and fast further erosion of earnings for the remainder of 2016 and beyond would require a massive revaluation of stock prices based on most standard earnings multiple metrics.

American Companies With the Most to Lose

Some of America’s biggest companies have huge exposure to the U.K. and Europe.

JPMorgan Chase & Co. (NYSE:JPM) employs 16000 people in the U.K. and generates substantial revenues from banking services and deal-making in the U.K. and across the E.U.

Ford Motor Co. (NYSE:F) employs 14,000 people in Britain and gets 18% of its revenue from the U.K. It is the number one auto brand there.

The Coca-Cola Co. (NYSE:KO), Abercrombie & Fitch Co. (NYSE:ANF), The Gap Inc. (NYSE:GPS), Invesco Ltd. (NYSE:IVZ), and Wal-Mart Stores Inc. (NYSE:WMT) all derive huge revenues and profits form the U.K. and countries all across the E.U.

The list of U.S. companies doing billions of dollars each in the U.K. and across the E.U. includes more than half of all the S&P 500 companies.

So, a Brexit would be devastating, not only for those companies revenues and profits, but because so many of them are such a big part of America’s big stock market benchmark indexes, U.S. markets would likely follow U.K. and European equity markets down the tubes.

It’s almost upon us. If you haven’t taken out some insurance against falling markets, it’s not too late…

By Friday morning, it might be.



5 Responses to If You Think American Stocks Are Safe From Brexit… Think Again

  1. Trefor Jones says:

    UK institutions and global corporations have, according to the Washington DC based Organisation for International Investment for the past 10 years to 2014 been the largest single country investor in the USA. The UK ‘s trade with the USA is greater than that of the UK with Germany or France. The UK is the worlds 5th largest economy whilst its exports to the EU have been in decline over the past decade and those to the rest of the world have been growing at a much faster rate. Long before the EU existed London was second only to the New York Stock Exchange and today raises more money for international finance than Paris, Frankfurt or Dublin have ever collectively achieved Even the association representing Germany’s largest 180 manufacturers has today urged its politicians not to erect trade barriers to the UK for to do so would be to severely harm Germany’s economy as the UK is Germany’s 4th largest export market.
    Whilst there will be volatility in the immediate short term in the longer term the UK will be stronger outside of the EU. Just stay long the world is not about to fall off a cliff !

  2. Adarsh Sharma says:

    HI Shah

    Free enterprise will always prevail and to suggest that an exit by UK will damage this is nonsense…………………just look at the economies like Iceland…………….thriving

    The EU benefits

    1. land owners ( 70% of UK land is owned by 6,000 families (through legal entities) and they get a massive tax free grants
    2. The top earners……………the very wealthy

    We will continue to buy e.g wine from France……….Mercs from Germany…………Fiats from Italy……………….Olive oil from Spain/Greece and they continue to buy from UK

    So why should earnings be affected??

    Short term currency movements will take place …………to make money for hedge funds and then they will stabilise

    We need to stop the Refugees ( mainly from Islamic countries) flooding UK ……………forced to take them by EU and we pay 37% of our taxes to pay for their welfare benefits as non are capable of finding a job or speak English or have any desire to mix with the British community

    I can go on and on……………we should leave and then take on the world and we will win and prosper

  3. Don Hoffman says:

    The UK will remain in the EU because all those 21 to 40 year olds don’t anything different, and are afraid of making a change.

  4. Heather says:

    Besides the trade factors which are a big contributor for Brexit – I think (for whateveritsworth) that migrant (Muslm) intake as EU would decide quotas for each country – chiefly contributed to Brexit.
    In saying that not all Muslims are fanatical – but those that are make up for the honest Muslim majority. When God was asked about the hawkers doing business in the Temple, he was so enraged at the disrespect – that he threw them out. And when asked why? He said Give to God what is due to God and give to man what is due to man. But the fanatical Muslims do not put Islam in its proper perspective and use it for grounds of abuse to others. And this is the BIG problem. Another major reason for Brexit. Besides no country in the EU have a say in how many migrants they can or cannot take in. Its all in the EU hierarchy.

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