Last Friday, January 31, 2020, we finally reached Brexit day.
The United Kingdom (UK) formally severed its relationship with the European Union (EU) after more than three years of contentious debate and negotiation since the June 23, 2016 referendum. If you looked no further than last week’s headlines, you might feel as though after years of languishing, this issue has finally reached the finish line.
While Brexit came and went in a peaceful manner, with EU headquarters in Brussels even lighting up in the colors of the Union Jack to wish the UK a fond farewell, the two sides have really only reached phase two of this saga, which could likely prove to be the most challenging.
Per the conditions of withdraw set forth, the UK and the EU will now enter what’s known as the transition period. This is set to last through the end of the year and gives both sides 11 months to effectively hash out what their relationship will look like going forward.
Is that timetable realistic?
Each side has the month of February to announce its negotiating stance for how to move forward with trade, law enforcement, data sharing, regulation of medicines and myriad other issues. That will leave just 10 months to reach agreements on all of these issues. Some of these agreements will need to be approved by all EU nations. Others will need the extra step of being ratified by some of those nations own parliaments or other authority.
All of this while the UK simultaneously negotiates similar arrangements with the US and others on their own.
It’s not too big a leap to think that this could drag out well longer than the initial Brexit phase.
What Are Investors To Do?
While we’re far from the days of the sun never setting on the British empire, the UK still represents about 5% of the world’s market capitalization. This means that if you take the value of all publicly traded companies (approximately $50.5 trillion as of 12/31/18), 5% (approximately $2.6 trillion) of that value comes from UK-based companies. To suggest that a country of that size renegotiating new trade deals with countries all over the world won’t have some impact on the market would be foolish. The challenge is in knowing exactly what that impact will be and for how long.
As one opinion piece put it, investors might be best suited to don their noise cancelling headphones when it comes to these negotiations, especially in the early going. There is likely to be much posturing and bluster as both the UK and EU position the other as being more in need of a deal.
While there is likely to be volatility around companies with heavy exposure to the UK market or the Pound, long-term investors will be well positioned to be patient, keep an eye on opportunities to rebalance into volatility in the UK and EU and expect that things will ultimately resolve themselves, possibly for the better, over what could be a long period of time.
In the end, we continue to find great value in the benefits of diversifying portfolios across the globe. Saying how this next phase may or may not impact companies in the UK, Europe or the world with any kind of certainty is done at one’s peril. Painful as it might be, companies both inside and outside the UK will continue to hire staff, develop products and services, research new ideas and reward investors for the risk they take in their companies as a result.