Brexit, Exit Update

With the resolution of the appropriate, legal path for the implementation of Brexit, the British House of Commons began debating the issue on January 31.  It is currently expected that a final bill will be approved by early March, after which, negotiations with the European Union (EU) can commence.  This process may take some time.

Britain is in a difficult position.  Approximately 44% of its exports go to the EU, which is the source of some 53% of its imports.  Obviously, the UK will seek to maintain as much of these relationships as possible.  But membership in the EU requires accepting workers from countries in the EU.  This may, in the end, be the crux of the negotiations.  British voters in the “leave” camp were clearly concerned about uncontrolled immigration.

The UK does some have some potentially strong bargaining chips.  One clear strength is that the UK is one of the EU bloc countries that has held on to their own currency.  Another positive talking point is that English is probably the world’s single most useful language in that almost all international business and diplomatic matters are held in English.  Also note that, from January 1, 2008, all Air Traffic Controllers and Flight Crew Members engaged in or in contact with international flights must be proficient in English.

The international importance of the English language may give pause to any rush to relocate headquarters and other major facilities to somewhere other than London.

Investors should recognize that, while the official negotiations are expected to begin in March and the EU treaties prescribe a two year time horizon, the complexity of the issues involved suggests the possibility of an extension, and/or a transitional agreement.  Under these circumstances, attempting to time market transactions based on the latest indications of a possible outcome may be futile and/or expensive.  In other words, don’t get caught by a “head fake”.

It might be helpful to remember the words of baseball legend, Yogi Berra, “it ain’t over till it’s over”.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®