How Stocks May React to Britain’s EU Brexit Vote

By Trey Thoelcke Updated Jan 13, 12:07PM EST · Published Mar 10, 9:55AM EST

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How Stocks May React to Britain’s EU Brexit Vote — © Thinkstock

In June, the citizens of the United Kingdom will vote on whether to stay in the European Union. The decision seems a momentous one, and indeed it is, for two main reasons. First, regardless of the EU’s faults, of which there are many, the EU does ensure one important thing. That is, the minimization of trade barriers between its member states.

There is no inherent connection between the EU’s existence and free trade in Europe. All European countries could theoretically retain free trade between them without any formal union. However, Britain leaving the EU could result in continent-wide bitterness that may result in tariffs being raised against the United Kingdom in a revenge move. The United Kingdom pays £50 million in fees every day to stay in the EU, and that money no longer going into the pile may inspire other European politicians to isolate the UK economically. The attempt would be to discourage any other nation from leaving the union and to paint the UK as an economic failure in the event that it does in fact leave.

It is unlikely that the rest of the EU will simply allow one of their members to leave without any consequences, so in the event that the United Kingdom does vote to leave, exiting British stocks would be a good idea, assuming punitive measures are taken against Great Britain.

As for U.S. equities, there may be a knee-jerk negative reaction to such a vote, but there shouldn’t be any long-term consequences across the Atlantic. The U.S. economy is firmly in the boom phase, with credit expanding rapidly and now even price inflation starting to show up. Pressure on stocks from the liquidation of sovereign wealth funds originating from oil exporting countries seems to have abated for now. Given that, there is no major force stopping stocks from trending higher from here. The fact that few seem to trust the extension of the current bull market into its eighth year only brings into focus the Wall of Worry that generally keeps bull markets fueled. Any move down in U.S. stocks on a Brexit should be seen as a buying opportunity, provided credit is still expanding at a moderate pace come June.
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The second and longer term concern with the United Kingdom leaving the EU is the precedent it sets for other secessionist movements throughout Europe. There are quite a few of those alive and well right now. You can find a map here that shows what Europe would look like if all of today’s secessionist movements got their wish. Again, there is no inherent reason for any secession to necessarily lead to economic contraction, if not for the probability of punitive economic measures taking by insulted political leaders against so-called offenders.

A bona fide Brexit would breathe new life into Scotland’s bid for independence from the United Kingdom, a bid that failed back in September 2014. Fears of a Grexit from the euro would be renewed as well, if precedent is set that the EU is not unbreakable. The strongest European secessionist movement currently is probably Catalonia, which has already voted for independence from Spain in a nonbinding referendum that was considered illegal by the Spanish government.

As of the latest polls, the vote in the United Kingdom is nearly evenly split, with a slight advantage to the EU camp. But come June, European stocks won’t be the place to be if the United Kingdom delivers a surprise and votes to go it alone.

About the Author Trey Thoelcke →

Trey has been an editor and author at 24/7 Wall St. for more than a decade, where he has published thousands of articles analyzing corporate earnings, dividend stocks, short interest, insider buying, private equity, and market trends. His comprehensive coverage spans the full spectrum of financial markets, from blue-chip stalwarts to emerging growth companies.

Beyond 24/7 Wall St., Trey has created and edited financial content for Benzinga and AOL's BloggingStocks, contributing additional hundreds of articles to the investment community. He previously oversaw the 24/7 Climate Insights site, managing editorial operations and content strategy, and currently oversees and creates content for My Investing News.

Trey's editorial expertise extends across multiple publishing environments. He served as production editor at Dearborn Financial Publishing and development editor at Kaplan, where he helped shape financial education materials. Earlier in his career, he worked as a writer-producer at SVE. His freelance editing portfolio includes work for prestigious clients such as Sage Publications, Rand McNally, the Institute for Supply Management, the American Library Association, Eggplant Literary Productions, and Spiegel.

Outside of financial journalism, Trey writes fiction and has been an active member of the writing community for years, overseeing a long-running critique group and moderating workshop sessions at regional conventions. He lives with his family in an old house in the Midwest.