While I’ve been travelling through the Black Hills, Grand Tetons and Yellowstone enjoying great scenery and hiking trails, you were probably mortified by one of the most volatile days on the stock market since the credit crunch in 2008. On Friday June 24th, all markets tumbled upon the crucial vote of Britain exiting the Eurozone.
I’ve taken a break from hiking in order to read more about what the potential consequences are and to see what was going on in the “real world” ;-). At first view, it appears to me like this is a big “we-don’t-know-what-will-happen-next” that is shaking the market. I’ve repeated it many times on this blog; the Street doesn’t appreciate the unknown. Whenever an important event generates uncertainty, we see crazy times. Here are the most important concerns so far…
Potential Franxit, Hollanxit and Italexit… or “All-Outexit”!
I guess this is the most important question that is being considered by investors and politicians; what will happen to other countries that are currently not happy within the Eurozone? Countries such as France, the Netherlands, Italy could exit later on following a new path that Britain has now created. The thought of having such a domino effect is enough to scare many investors. What will happen to the many trade agreements across countries? What will happen with the Euro currency? How American or Canadian companies will have access to the Eurozone if many countries are not part of it anymore?
Such massive exits from the Eurozone would create a giant mass of documents to create, read and analyze. This will also generate even more anxiety from the stock market. Many companies have their business plans based on what they know; they can trade across Europe as long as they are established in one of the countries that are in the Eurozone. If this commercial zone was to shrink, many companies would have to move their business elsewhere or establish another unit in a Eurozone country. This could complicate business and obviously reduce margins for everybody. This is probably why the market is in such a panic right now. We never like to see profits falling, right?
United Kingdom Disunited?
Another concern that is directed toward to the UK situation is that smaller countries forming the UK might want to get back into the Eurozone and leave England alone with their vote. Scotland’s relationship with London hasn’t been the best marriage ever. The country has already stipulated that they will closely look at their options and another possible referendum to enter the commercial agreement was already on the table.
At this point, this would create even more chaos around England and it will definitely complicate doing business across the small island. Imagine all businesses that have a unit in Ireland to benefit from lower taxes? They are now sitting in a very complicated situation that is not about to be solved any time soon.
UK Economic Earthquake
The problem with this vote is probably that this touches a very complex economic situation. Nobody really knows what is coming next and this is why it will become urgent for both the UK and Eurozone to finalize an exit agreement as soon as possible.
For now, it is very possible to see companies cutting jobs in the UK to move to their European units elsewhere on the continent. This is not going to help the British economy!
But What’s in it for You & Me?
Now that we have covered most of concerns in Europe with regards to the Brexit, what is really important is to see is what will happen on this side of the border. So far, I’m not too worried when I see how much business is done in the UK:
Source: FacSet
Among my Dividend Stocks Rock holding, BlackRock (BLK) is probably the company that could be the most affected by the Brexit. BLK shows nearly 22% of its revenue coming from UK. On the other hand, this business is done in the UK as England already has regulations around financial advisors that must choose the best investment products (read leave high paying MERs at the door) for their client. I doubt this will change anything for BlackRock in the future. The London Stock Exchange will remain very strong and investing will continue after the Brexit.
At one point, we must all remember that most Euro countries will continue to do a lot of business with the UK. It’s not like they will shift their economy away from the UK in a heartbeat. New trades agreements will be made and life will continue. So far, I think the major risk remains in seeing the Eurozone going bust with more exits in the upcoming years. This would create a more important chaos combined with more volatility!
What is left to do? Invest!
I’m currently kicking myself right now as I really wanted to invest more money into the market. Such a good drop in the market creates great buying opportunities. To be honest, I don’t think this news is big enough to take away 5-10% in value of any company. Therefore, if the stock market drops temporarily, this is only a good time to buy more of your favorite holdings and enjoy an even better dividend yield.
I think that revisiting my Mike’s Buy List (DSR member receives an update monthly) could be a very good starting point for your next purchase.
Here we are two weeks later, and the markets are now higher. Bye it has had zero impact