The European Union is still digesting the shock of the Brexit vote. The question on everyone’s lips is: How will the European Union react to the news that the UK has voted to leave? With the bloc’s stock of 56 million people, the UK is the EU’s third-largest trading partner, and its biggest outside member state. So what will this mean for the markets? And how can you profit from it?
In this article, we take a look at the most important pressure points that the European Union needs to keep in mind in its dealings with the UK as it enters what will likely be a period of uncertainty. We also look at what other major stock markets are doing, and what that might mean for you.
Trade with the EU
The European Union is a trading bloc of 28 sovereign states, each of which has its own economy and politics. The European Single Market is made up of hundreds of millions of consumers and businesses that trade across national borders every day. That’s why the British decision to leave the EU is such a big deal. If the UK leaves the EU and forms a new trading relationship with Canada or Mexico, it will do so without having to follow all the rules laid out by the rest of the EU.
While the rest of the world’s stock exchanges are largely open for business after the shock of the Brexit vote, the European Union’s (EU) stock markets are still trying to absorb the news.
How long will this disruption last? That’s up to the EU27 countries (the UK, the EU, and Switzerland) to decide.
The best-case scenario for the EU’s stock markets is that they will remain relatively stable when the dust settles. In that case, investors will be all over the place, making it hard for even seasoned stock pickers to find stocks with good value.
At the other end of the spectrum, we could see significant losses. We could also see an incredible run on the stock market. The chart below shows the performance of the S&P 500 index over the past 100 years. If we could time travel, we’d love to pick up the coins minted in 1896, the first year of the US stock market crash, when the index lost about 40% of its value.
The UK economy
The Brexit process has been chaotic and unpredictable. And though the World Bank estimates that the overall economy will grow by 1.6% in the year ahead, that growth will be achieved at the expense of many small and medium-sized businesses. There will also be a reduction in investment, which will slow the overall growth rate. As a result, employment will fall and the amount spent by consumers and companies will fall too.
A large part of the Great British Copper industry has remained in operation following the restructuring of the UK’s post-war economy. That’s a positive for consumers, but an unwanted by-product for business in that it’s meant to provide a check on inflation.
The uncertainty over the Brexit process
There is uncertainty over the exact terms under which the UK will leave the EU. Just as there is uncertainty over the regulatory landscape in the US after the Brexit vote, there will be uncertainty over the process of leaving the EU.
The Basics of Brexit Breakdown – Business Insider
The EU has set out rules for how the process should work, including the option for people to appeal against any decision taken by the government. The government must follow those rules, or face a legal challenge.
How will the different Brexit outcomes affect the broader economy? That’s a difficult one to forecast. In the short term, it will affect stock markets, of course, but the bigger picture is that uncertainty is a great drag on growth.
Right now, we are witnessing a falling currency
The pound has been on a fall since the beginning of the year, and is now close to a 14-year low against the dollar. The reason for this is that the uncertainty over how the UK will leave the EU has caused businesses to hold back on their spending.
That means more money is sitting in the coffers of the Bank of England, which is holding down interest rates. That money is being used to buy British debt, which is driving down the value of the pound. That will make it harder for British businesses to compete for foreign orders, making it harder for the UK economy to grow.
What’s next for the European stock markets?
The European stock markets are up almost 10% this year, making them one of the best performing market sectors in the world. They are also set to gain even more ground in 2016.
But the gains are being made at the expense of smaller investors, who are being hit hard by the fall in the value of the pound. That has left many wondering how they can benefit from the decline in the pound.
Some of the big investors are lifting their stakes in the sector, but for many smaller investors the fall in the pound is a double-edged sword. They may make a profit from it in the short term, but it will be tempered by the fact that they are being hit hard by the fall in the value of their investments.
The uncertainty surrounding the Brexit process has led to a falling pound, reduced investment, and a decline in consumer spending. That, in combination with less demand for British goods, may result in an economic decline of 0.5% this quarter.
That may seem like a lot, but remember that it is only the first quarter of 2016, and the average decline of 1.0% over the full year is what has occurred in the wake of every major disruption caused by a major event.
Thus, we can expect this disruption to last at least as long as the EU27 nations (France and the UK) remain in the EU.