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Why Brexit Still Matters for U.S. Investors

Dan Caplinger, The Motley Fool

The stock market in the U.S. has done extremely well so far in 2019, with most major market benchmarks seeing double-digit percentage gains. Yet even though the domestic economy is still running strong, many market participants are concerned with what's happening around the world. Global economic growth is slowing, and high-profile disputes between the U.S. and several major trading partners have created uncertainty about the future for the markets.

Another key issue facing investors has been Brexit. The question of whether and under what terms the U.K. will exit the European Union has been outstanding for years now, with only minimal progress toward a final resolution. Recently, though, there's been a lot of movement on the Brexit front, as the departure of former Prime Minister Theresa May and the subsequent July selection of Boris Johnson to succeed her set new expectations on a quick timeline. Johnson has said that Brexit will get done by Oct. 31, regardless of whether the government can negotiate favorable terms with the European Union, and political wrangling has included threats to dissolve the British Parliament and call for a general election even as lawmakers seek to pass legislation prohibiting a no-deal Brexit from taking place.

Brick wall, painted half with U.K. flag and half with EU flag.

Image source: Getty Images.

How Brexit could hurt U.S. companies

U.S. investors often focus almost exclusively on domestic concerns, and so it's reasonable to ask why you should care about Brexit. The simple answer is that the effects of Britain's departure from the EU will ripple well beyond Europe and will have implications for many of the core issues facing the U.S. economy.

Most of the U.S. companies that have the greatest influence on stock market benchmarks are multinational corporations with exposure to the entire global economy. For them, Europe has been an important market, and retaining access to European commerce is a critical element of many companies' growth strategies. With the U.K. being part of the EU, U.S. companies have been able to use the U.K. as an entry point to the rest of Europe, taking advantage of a common language and long, close relationships in the business communities of the two nations to forge a pan-European presence for their operations. In addition, corporate employees based in the U.K. have been able to travel to the EU with relative ease.

Brexit threatens those arrangements, forcing U.S. companies to consider other ways to retain access to Europe. Ireland would remain an English-speaking EU member, and many businesses already have added Irish operations to their global footprints. Yet Ireland isn't the ideal answer for every business, and some will have to look more closely at building up a greater presence in continental Europe. The transition will cause disruptions and will inevitably be costly.

Brexit's financial market impact

Already, Brexit concerns have weighed on global markets. The value of the British pound has fallen substantially against the U.S. dollar and other major global currencies. Exchange rate fluctuations have an impact on the number of U.K. travelers visiting the U.S., and thus affect U.S. businesses that rely on British tourism.

London's status as a key financial center is also in doubt because of Brexit. In areas such as insurance and foreign exchange, British companies often play a more important role globally than their American counterparts. Financial institutions in London, whether they're based in the U.K. or form part of companies headquartered elsewhere, will have to restructure if the U.K. leaves the EU. That could put strain on the global influence of British institutions.

More broadly, though, Brexit would be just the latest sign of a bigger trend away from globalization. The trade conflict between the U.S. and China has already forced U.S. companies to consider shifting their Chinese supply chains to other countries, and if tariffs and other trade impediments become more widespread, then it'll eventually give companies large incentives to locate manufacturing and production assets in the countries that purchase their goods and services.

Similarly, a more nationalistic stance in the U.K. would create tensions between it and remaining EU members, stirring up more discord and raising questions about the appropriate strategic response for companies to take. All told, companies could become a lot less efficient, and that could hurt corporate profits substantially. Even in the relatively strong U.S. economy, that could be enough to put a 10-year bull market to an end.

The U.K. has been an important partner for the U.S. for generations. Brexit could devastate the British economy, and the U.S. relies enough on British economic strength that investors would feel the ripple effects across the Atlantic and beyond.

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