The June 2016 referendum to pull the United Kingdom out of the European Union shocked people, politics and markets alike. Britain’s prime minister, Theresa May, began the two-year process of disengaging from the EU in March of this year, laying the groundwork for the pullout. Official negotiations to begin the “Brexit” began in June, but Britain must follow a long path to a full exit.
In the meantime the world watches and waits. “Investors need to know — no matter where they are in the world — exactly how much European risk they have,” says Howard Marella, president of Icon Alternatives, an investment firm in Chicago. “What companies do business there, or are owned or operated partially or fully by Britain? What companies in the U.S. are dependent on their products and so on? This could be a good or a bad thing, depending on which side of the exposure you are on.”
Here’s what you need to know.
Uncertainty Casts a Cloud
Markets don’t like unpredictability, and the questions around the timing and process of Brexit have not been answered, making economists nervous. Over the next two years the U.K. Parliament needs to pass several laws to get Britain out of the bloc, Marella says. Negotiating the withdrawal from the EU could make for an “ugly break,” he says, and immigration, citizens’ rights and taxes are primed to be contentious issues.
Investors and businesses need to be aware of how much European risk they have as the clock ticks, Marella says. In addition, they should keep an eye on political changes in the U.K. and the United States in the next several years, experts say.
Strong Dollar Hurts Exports
Currency markets are likely to be uncertain for some time as well, experts say. The pound sterling may face some pressure, while a consistently strong dollar has already been disruptive to global trading patterns, says Marci Rossell, chief economist at Leading Real Estate Companies of the World, a global real estate network headquartered in Chicago. With a strong dollar, imports from Britain are cheaper and exports to Britain are more expensive.
In some cases the effects of Brexit will depend on where the U.S. economy is by the time it’s completed. While the U.S. economy saw solid growth in the second quarter, economists caution that the Trump administration has not implemented many economic policies yet, so it’s difficult to tell where the economy might be in two years. In addition, as world growth stalls around the same percentage, Rossell says that may undermine confidence in the idea of global markets.
Increased Trade with Britain Is Possible
As the U.K. looks to strike out on its own, it’s likely to seek to strengthen its business relations with the U.S., experts say. At the end of July the two countries met to discuss a continuity agreement that would outline trade possibilities after Brexit, as well as a future free-trade agreement once the U.K. has left the EU.
Large international trade deals could also soften the effects Brexit might have on the U.S. economy. But negotiations around the Transatlantic Trade and Investment Partnership (TTIP) slowed after the Brexit vote, and the Trump administration has expressed a preference for “bilateral deals.”