The latest weekend survey by the Daily Mail predicted the outcome of the June 23, 2016, U.K. vote in the “stay” column 45%-42%, as European markets either ralied or rebound on the news—depending on their timing and view of the situation. The vote, which has been talked about for a while, came to the front burner last week, as the possibility of a “go” vote emerged, and markets reacted to the potential of significant European disruption in financing, trade, and labor. The European impact will be significant, regardless of the vote, given the split among the voters and politicians and the mostly one-sided “stay” among business leaders. Market volatility and an increase in trading is expected—again, regardless of the outcome—with the action taking effect globally.
A vote to stay will not end the debate, but could disrupt markets less, as the status quo permits business to continue. In the longer term, since the issues would not stop with a “stay” vote, the ability of companies to commit to business plans (be it capital expenditures, hiring, M&A, or financial) could be impaired.
A vote to go could bring years of uncertainty, as the process to decouple would start, along with expected higher market (and political) volatility. The best analogy at this point appears to be that a “go” vote would be similar to getting a divorce with no prenuptial agreement. Issues of separation, use, and ownership of assets, rights, and labor would each need to be worked out by the overseeing agencies (and politicians). The uncertainty in the short term could cause a disruption in business operations, as trade and travel would have to be negotiated.
From this side of the pond, the impact on U.S. stocks might be considerably less, but a knee-jerk reaction could be expected, with a prolonged one for a “go” vote. Overall, S&P 500® companies derive 45% of their sales from abroad, with approximately 8% of all sales from Europe. U.K. sales have been on the uptick this year and account for approximately 25% of the European sales (2% of all S&P 500 sales). Reporting on foreign sales in the U.S. is poor to say the least, with only one-half of the companies giving detailed information. Even among those that report, a country breakdown is typically not given. That said, Exhibits 1 and 2 show some of the issues that are more exposed to U.K. sales, along with those with exposure in Europe.