Brexit vote: 3 reasons why investors outside of the U.K. should care


It’s crunchtime for Brexit this week, with the drama over negotiations and options for how the U.K. could leave the European Union set to come to a head.

U.K. Prime Minister Theresa May agreed to a Brexit deal with EU leaders late last year but delayed a parliamentary vote due to fears the plan would be defeated. With the U.K.’s departure date March 29 rapidly approaching, the vote is now slated to take place on Tuesday.

If May, who has been trying to shore up support over the past days, wins the vote, the U.K. will leave the European Union at the end of March with an agreement in place setting out the terms of its relationship with the bloc. In other words, the U.K. would be on track for a so-called soft Brexit.

But that’s not the scenario that is most expected by the market. The deal was seen as likely to be defeated, perhaps heavily. On Monday, Conservative Party whip Gareth Johnson resigned over the deal, though that was later offset by a news report that Conservative members of the European Research Group, a hard-line Brexit faction, would back the deal.

While a number of possible scenarios would be in play if May’s plan was defeated, the biggest worry would be the potential for a so-called hard Brexit, in which the U.K. leaves the EU without an agreement on the relationship between London and Brussels.

Check out: Brexit Brief: The key dates and times in the week ahead

If she loses the vote, which is expected to take place after 7 p.m. London time (2 p.m. Eastern) on Tuesday, an amendment passed in Parliament earlier this month gives the government three days to come back with a new proposal before control over Brexit goes back to Parliament. The Labor Party has meanwhile threatened to call a vote of no-confidence in May’s government if the deal is defeated in an attempt to force a general election.

See: This Brexit chart shows what could happen next

In other words, Tuesday’s vote holds the keys to a possible collapse of the British government, fresh elections, a second Brexit referendum, soft Brexit, or hard Brexit. As a result, sentiment surrounding U.K. assets, including the FTSE 100 Index

UKX, -0.91%

 and the British pound

GBPUSD, +0.2726%

EURGBP, -0.1567%

is in a fragile state, as things could swing either way.

Read: Here’s why traders are bracing for a volatile British pound ahead of vote on May’s Brexit plan

For investors outside the U.K., this might seem a far away problem. But there are three key reasons why this week’s developments could impact investments elsewhere, particularly if the path forward remains unclear and the prospect of a no-deal Brexit is seen on the rise.

1. Uncertainty for global businesses, especially banks

The U.K. is a home away from home for many U.S. corporations, including financial powerhouses like J.P. Morgan

JPM, +0.84%

Bank of America Merrill Lynch

BAC, +0.92%

and Goldman Sachs

GS, +0.50%

Many multinationals have spent a good amount of money bolstering up their other regional European offices in places like Dublin, Paris and Frankfurt. Still the exact impact on London’s financial sector, as well as individual companies’ reactions, isn’t known and earnings, as well as share prices could suffer.

2. Trade

Leaving the European Union would mean that the U.K. is also exiting the trade agreements the EU has with its partners. So the U.K. would need to negotiate separate deals. If multi- and bilateral trade talks of the past year have taught investors anything, those negotiations can take a while.

Meanwhile, the U.K. would likely revert to tariffs set out by the World Trade Organization, which aren’t terribly high, but still higher than the current ones. This could hamper trade volumes, and create backlogs at European ports that will suddenly have to add customs formalities, not to mention increase costs for U.K. consumers.

3. Economic weakness

Should U.K. economic growth decline as a result of Brexit — whichever form it may take — this would coincide with a much feared slowdown in global growth, which central bankers around the world have been flagging for the better part of the past half year.

See: OECD sees further global growth slowdown ahead

And: Global growth to lose momentum in 2019: World Bank

That said, the U.K.’s economy certainly doesn’t have the same sway as that of China. A downturn for the U.K. would likely be much more contained, but it would leave a mark on European and eurozone economic activity, and again impact multinational companies doing business in Europe.

The bottom line is that the global economy is too entangled to claim that Brexit won’t have an effect outside the U.K., so investors elsewhere should keep their eyes open for this week’s developments and their effect — at the very least — on market sentiment.

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Source : MTV