Why a ‘Brexit’ would be a bad business for both the UK and EU ?>

Why a ‘Brexit’ would be a bad business for both the UK and EU

The world is worried about a ‘Brexit’, that will take place this June 23, when Britons are going to decide if the want to remain in the European Union or leave it via a referendum.

As can be seen in the following picture (a chart created by Bloomberg), the results are going to be really close and it seems that those people who are undecided are the ones who are going to decide the final result.

survey

 

But what is going to be the impact if the decide to leave?

Well, taking a fast look at imports and exports numbers, we can see that just taking into account Germany, Netherlands, France, Spain, Italy, Belgium and Luxembourg represents a 26% of UK’s total exports. Then, as some organizations have calculated, taking into account the whole European Union and those countries with which the EU have a trade agreement (and by which the UK can trade with them) represents a close to 60% UK’s total exports.

So, in the case of a Brexit, all those deals would have to be renegotiated, creating a huge impact in exports and as a consequence a huge impact in the UK’s economy, as revenue would be badly affected.

I also thin that the EU would make it hard to reach a trade agreement with the UK in order to ‘boycott’ the country as a punishment for leaving the EU. But that wouldn’t be all, as capital flows would also be affected, and we all know that the UK needs those flows as is the ‘European financial capital’.

On the other hand, we have the problem that close to a 50% of their imports come from the EU, so their goods imports would be more expensive, creating inflation in the country and at the same time profits would decline (as companies would have to reduce margins and/or transmit part of that increase to customers). That would also be a big problem for the EU countries that, as we know, are not growing too fast, so the impact would be negative for the EU and growth would be affected negatively. That could make the EU enter a new recession that would be devastating as the ECB is ‘out of ammunition’ to deal with a problem like that (and the global macro situation would not help).

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In my opinion, if they decide to remain in the EU, the GBP and FTSE index are long, as the have been punished since January for that fear to a leave. I think that there are great opportunities right now, specially with those companies that sell their products to the local market and to non EU countries  such as the USA.

On the other side, if they decide to leave, I will short those companies dependent on the EU market, as their revenue will be affected not only by trade restrictions but also by an increase in the GBP and Euro volatility.

I think that, for those who have any asset in the UK or dependent to that country a long position in the VSTOXX or the BPVIX.

3 thoughts on “Why a ‘Brexit’ would be a bad business for both the UK and EU

  1. Good post, I don’t think the Brexit is going to take place because nobody – as far as I can see – would really profit from it, they are just gonna use it as leverage in order to obtain better conditions within the union. I could be totally wrong tho but I think it’s a great chance to invest on UK or GBP listed companies.

    I didn’t know about the BPVIX, whoever invisted on it must be quite happy today 😀

  2. Thanks Alex!

    I also hope it won’t happen, but we’ll see… People seems to be more concerned about other things rather than the economic impact it will have ( in my opinion will be a disaster in the short and medium term).

    I’m looking at some companies to invest in if they decide to stay in the EU but, on the other hand, i’ll open a short if they decide to leave it. I think that’s the best way to trade it. I also expect volatility to increase while we approach the voting day, so that’s why I recommend opening a long in uk related volatility.

    1. Yeah you provided two great volatility related ideas, sadly my broker doesn’t offer much on those two and the VSTOXX Future is too much for my small capital haha

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