What is Brexit?
On January 1, Britain exited the regulatory orbit of the European Union, ending nearly half a century of membership in the bloc and beginning what observers regarded as the largest overnight upheaval in contemporary economic relations.
Far from shutting the book on Britain's turbulent relationship with the rest of Europe, the Brexit vote has begun a new chapter — one that has the potential to change not just the country's economy, foreign policy, and politics, but also its boundaries.
Prime Minister Boris Johnson now talks about building a more nimble “Global Britain,” with better links to the US and other democracies like Australia, India, and South Korea.
While that strategy is still in the works, the hazards of the new regime have already manifested themselves, in the shape of as little as a ham sandwich confiscated from a truck driver to as major as a naval conflict in the English Channel.
The European Union
The European Union (EU) is a collection of 28 countries that trade and enable their citizens to freely travel between countries to work and live. Initially, it was constructed on the ashes of World War II in order to bring decades of violence to an end and to combine economic power.
The United Kingdom joined the European Economic Community (a regional organization aiming at bringing economic union among its member nations) in 1973, and it later became a member of the European Union when it was formed in 1993.
However, the UK has always kept a distance from the EU. It has its own currency, the pound sterling, and has refused to join the Schengen accord, which eliminates internal border restrictions inside the EU. People in the British political establishment have long been opposed to the notion of the EU, and this resistance has become stronger since the 2008 financial crisis. The influx of migrants from poorer EU member states, as well as the dread of refugees from Syria, Africa, and the Middle East, heightened distrust among voters and lawmakers.
In 2012, then-Prime Minister David Cameron pledged a referendum on whether the United Kingdom should stay in the EU or exit. He maintained his word, and the referendum was held on June 23, 2016. Cameron resigned shortly after the results were revealed.
What’s next after Brexit?
The December 24 trade pact was merely the beginning of a high-stakes and unexpected experiment for bankers, merchants, truckers, architects, and millions of migrants.
According to industry analysts, Britain has a shortage of customs agents to handle the tens of millions of declarations that are now required. It has postponed some of its own planned border controls until 2022.
In the four years following Britain's referendum, the number of Europeans traveling to the nation for employment fell dramatically, and British firms transferred staff to Paris and Frankfurt to establish footholds on the continent. The amount of employment that will be moved or generated in different locations is still being determined.
So, too, is the future of certain European Union countries. citizens of the United Kingdom More than two million people have been awarded “settled status,” or the permission to remain in the country permanently. However, applications conclude at the end of June, and the process makes little allowances for people who are unable to do it electronically, much alone those who are unaware they require permission to continue in a place they have lived for decades.
Why did the United Kingdom decide to leave the European Union (EU)?
The Conservative Party asked for the referendum in 2015. The majority of pro-Brexit supporters were elderly, working-class people from England's countryside. 6 They were concerned about the unrestricted movement of immigrants and refugees, alleging that residents from poorer nations were stealing employment and benefits.
EU fees upset small companies as well. Others believed that exiting the EU would result in employment creation. Many people believed that the United Kingdom paid more into the EU than it received.
Those who voted to remain in the EU were mostly from London, Scotland, and Northern Ireland.
They supported free trade with the EU and stated that the majority of EU immigrants were young and willing to work. Most people believed that leaving the EU would harm the United Kingdom's worldwide standing.
How did Brexit impact the EU?
Brexit is a referendum on globalization. As a result, it has undermined pro-integration forces inside the EU. Members of anti-immigrant right-wing parties are notably anti-EU in France and Germany. They might compel an anti-EU vote if they garnered enough ground. If either of those nations left, the EU would lose its most powerful economy and disintegrate.
The majority of EU people, on the other hand, continue to firmly favor the union.
According to a Pew Research Center poll of ten European countries, over 75% believe the EU fosters peace and 55% feel it produces wealth. Furthermore, more than a third believe that the United Kingdom's influence is dwindling.
Brexit impact on the US Stock Market
Because US investors frequently focus almost entirely on local issues, it's natural to wonder why you should worry about Brexit. The basic answer is that the consequences of Britain's exit from the EU will have far-reaching consequences for many of the key challenges confronting the US economy.
The majority of the U.S. firms with the most sway on stock market benchmarks are multinational enterprises with exposure to the whole global economy. Europe has been an important market for them, and maintaining access to European trade is a key component of many firms' expansion strategy. Because the United Kingdom is a member of the European Union, American firms may utilize it as a gateway to the rest of Europe, using a shared language and long, strong links in the two countries' business communities to establish a pan-European presence for their operations. Furthermore, business personnel in the United Kingdom have been allowed to travel to the EU with reasonable ease.
Brexit puts such accords in jeopardy, pushing US firms to look for alternative methods to maintain access to Europe. Ireland would remain an English-speaking EU member, and many firms have already expanded their worldwide footprints to include Irish operations. However, Ireland is not the best solution for every firm, and others may need to focus more on expanding their footprint in continental Europe. The changeover will cause interruptions and will undoubtedly be expensive.
Brexit has slowed corporate growth for European firms. In 2019, US firms invested $851.4 billion in the United Kingdom. The majority of this was concentrated in the financial and insurance industries, as well as manufacturing and nonbank holding businesses. Previously, these US firms exploited the UK as a conduit to free trade with the EU states. Businesses in the United Kingdom, on the other hand, invested $505.1 billion in the United States in 2019, a 1.7 percent increase over 2018. The majority of this was in the manufacturing, wholesale commerce, and banking industries.
The United Kingdom is in the midst of negotiating a trade agreement with the United States. Agriculture is the most significant impediment. The United Kingdom has stricter food safety and animal welfare standards than the United States. Farmers in the United Kingdom are afraid that inferior, lower-cost agricultural goods would drive them out of business.
How does the US cope with Brexit?
The atmosphere in the US banking sector switched from one of self-congratulation—all big US banks met regulatory capital minimums in the Dodd-Frank Act Stress Tests (DFAST) for the second year in a row—to one of heightened worry over the consequences of the Brexit decision. Even banks with no presence in the United Kingdom or the European Union must suddenly contemplate a slew of consequences.
Many banks have begun implementing contingency measures devised in advance of the election. However, as the drama unfolds, more will undoubtedly be required. Of course, final outcomes are unknown at this moment, but our hypothetical base case assumes the following essential circumstances in the future:
- A protracted and complex negotiating procedure that adds to political and economic instability.
- Post-separation trade friction between the United Kingdom and the European Union.
- Due to immigration limitations, there is less free movement of individuals between the European Union and the United Kingdom.
- During the transition phase, the regulatory environment will become more complicated and unpredictable as certain EU rules are changed, replaced, or deleted for UK-specific legislation.
In a volatile climate with no obvious direction for markets in general, we continue to believe in a dynamic strategy, reacting to market events to “sell the rallies” or, when appropriate, “buy the dips.” Identifying the signals in the noise is a difficult task that necessitates a methodical approach. Following a multi-year bull market in stocks, the recent climate has been one in which risk management has been and will continue to be critical in safeguarding returns. This is accomplished in multi-asset portfolios by diversification, notably away from pure equity risk, and through the use of options to build a more appealing risk-reward pay-off.
The implications of the UK's referendum decision will affect both the United Kingdom and the rest of the world in the days and weeks after the vote. No doubt, the disruptive market conditions we've experienced since the beginning of 2017 are no surprise to us. The question is, how can we safeguard against risks while simultaneously seeking for value possibilities where the market has gotten ahead of our expectations?
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