U.K. surprised the world by voting in favor of leaving the EU, albeit the votes showed a narrow margin between ‘leave’ and ‘stay’ votes. While 51.9% people voted for Brexit, 48.1% voted to stay, making it the biggest strategic decision in decades. Polls showed a neck-and-neck race between Brexit and Bremain in the run up to the referendum.
Impact on the U.S.
Currently, U.S.-based companies are allowed to operate anywhere in the EU as long as they establish a branch or subsidiary in any one of its 28 member states. As per a research report by Deloitte, London is home to 40% of the European headquarters of the world's 250 top companies. Brexit casts a dark shadow over the future of these companies and their trade ties.
There is no historic precedent to Brexit. It could have a negative impact on Britain’s GDP and the country might as well sink into recession. As things stand now, it will certainly result in turbulence in the U.S., which has already been reeling under pressure due to uneven domestic growth, weak corporate earnings, Fed’s policy uncertainty, sluggishness in emerging markets and global growth fears.
In fact, Federal Reserve Chair Janet Yellen sees it as having "significant economic repercussions". Although, she stated that Britain's departure from the EU is not likely to trigger a recession in the U.S., she took a cautious stance and warned of considerable uncertainty.
Earlier this month, the Fed announced its decision not to raise interest rates and hinted that further increases would most likely occur at a slower pace than expected previously. Yellen even stated that a Brexit vote was one of the factors behind the Fed holding rates constant apart from mixed readings on the labor market and economic growth.
In the last trading session (on Jun 23, 2016), U.S. stocks were buoyed by speculations that U.K. will choose to remain in the EU. As a result, most U.S. stocks closed more than 1% higher and the pound touching near year-to-date highs against the dollar
However, following the outcome of Britain’s vote, U.S. stock index futures sank lower. As per a report by CNBC, Dow Jones futures broke below an implied open down more than 700 while, the S&P 500 and Nasdaq, were implied by futures to open 5% lower than the last trading day’s close.
In the near term, the market is going to move significantly one way or the other. In this scenario, let’s look at certain sectors and their constituent stocks that are likely to suffer as a result of Brexit.
Sectors and Stocks that Could Plunge
The first and obvious victim of Brexit is going to be the financial sector. The sector is already in a tight space with the Fed not likely to raise interest rates till December. Brexit gives the Fed another reason to be dovish. Meanwhile, several U.S. banks have high exposure to Europe, the Middle East and Africa (EMEA) region. As per another CNBC report, The Goldman Sachs Group, Inc. (GS - Free Report) , Morgan Stanley (MS - Free Report) , JPMorgan Chase & Co. (JPM - Free Report) , Citigroup Inc. (C - Free Report) and Bank of America Corporation (BAC - Free Report) generate 27%, 15%, 15%, 13% and 7% of their revenues from this region. With Britain cutting ties with Europe, these could face the brunt. JPMorgan Chase CEO Jamie Dimon has warned that Brexit would seriously hurt not only the banks but the global economy.
Another sector likely to fall prey is energy. Several companies headquartered in the U.S. share strong business relations with Britain and use it as a gateway to access other EU countries. Apache Corp. (APA - Free Report) , which operates pipelines and facilities in the UK and gets about 20% of its revenues from the U.K. is likely to be hurt. Other energy stocks ConocoPhillips (COP - Free Report) and EOG Resources, Inc. (EOG - Free Report) could also face some heat.
Big auto companies could also feel the pinch as their business thrives on demand in the U.K. For example, Ford Motor Co. (F - Free Report) had almost 19% exposure in the U.K. as per estimates from Bloomberg & J.P. Morgan. Penske Automotive Group, Inc. (PAG - Free Report) also generates a significant amount of revenues from U.K. Thus a potential recession in the U.K. will dent the financial results of these companies as well.
Several U.S. technology companies rely heavily on British sales. As per data from FactSet, for the IT companies listed in the S&P 500, the U.K. accounts for approximately 4% of their revenues. According to Bloomberg and J.P. Morgan estimates, eBay Inc. EBAY generates a large chunk (approximately 16%) of its revenues from Britain. Thus, it is likely to bear the brunt of Brexit.
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