What U.S. investors can expect from Brexit vote shocker
Rude Britannia. How else to describe Britain's shocking vote Thursday to leave the European Union -- a decision that seems sure to upend stock, bond and currency markets around the world for weeks and even months to come.
Investors dumped European shares as soon as the markets opened Friday, following earlier drops in Asia. Britain's FTSE 100 plunged about 8 percent while Germany's index tanked 10 percent. France's index tumbled 7 percent. Oil prices crashed and U.S. futures also took a big hit. The pound hit its lowest level in three decades.
News of the Brexit vote, which trickled in when Asian markets were trading, hit Tokyo stocks fast and hard. The Nikkei 225 plummeted about 8 percent, its biggest fall since 2008. Governments in Asia vowed to take measures to stabilize the financial markets as the uncharted, unexpected path of a European Union without Britain sparked panic pretty much everywhere.
"You can see people are running for cover," said Ken Courtis, chairman of Starfort Investment Holdings in Tokyo. Most investors were betting on a victory for the remain side of the Brexit referendum, but "what you're seeing now in markets is an adjustment in the other direction, as everyone tries to get through a tiny door at the same time," he said.
American investors should gird themselves for a similar experience with U.S. markets Friday, judging by a near-700-point plunge overnight in futures contracts tied to the Dow Jones industrials average. S&P 500 futures nosedived 5 percent, triggering curbs on trading them until the market opens at 9:30am ET.
"Our fear is that this [Brexit decision] may trigger political uncertainty within Europe which in turn may lead to a severe global market correction," Saker Nusseibeh, chief executive at Hermès Investment Management, told the Wall Street Journal.
Maybe worse than that, even. "The outcome of the referendum is a shock fully comparable to the bankruptcy of Lehman," British economist Anatole Kaletsky wrote Friday morning in a note to clients that he shared with CBS MoneyWatch.
("Lehman" refers to the implosion of the Wall Street investment house Lehman Brothers in September 2008. Its bankruptcy sparked a panic that transformed an esoteric subprime-mortgage crisis into a full-blown global financial meltdown that vaporized nearly $10 trillion in market capitalization from global equity markets in October 2008, the biggest monthly decline on record at the time, according to Investopedia.)
Kaletsky on Friday pointed to the pound's plunge over the course of mere hours. "Rarely, if ever, has a G7 currency fallen by 10 per cent in a single trading session, as the pound did last night in Asia, ending up at its lowest level against the dollar since 1985," he noted. "As in the immediate aftermath of Lehman, the priority [for investors] must be to protect positions, raise cash and retain optionality to respond to whatever opportunities or disasters may emerge in the coming weeks and months. "
The U.K.'s share of global GDP may only be around 4 percent, Kaletsky said, but Britain punches well above its weight due in large part to its concentration of international banks and financial services giants and their books of business with all kinds of companies in all kinds of places.
"As we learned from the sub-prime crisis," Kaletsky said, "serious disruptions in a small part of the global economy can be magnified many times over by global interconnections -- and this amplification process is much more powerful and much faster when it works through financial markets and investor expectations, and not just through the interconnections in trade and manufacturing that dominate conventional economic models. Given Britain's very large current account deficit and the exposure of the British banking system to property values, the potential for financial crisis and then contagion to the rest of the Europe is a clear and present danger."
As Brexit inevitably ripples across the Atlantic, Americans should be prepared for both short-term and long-term disruptions in everything from trade to equity markets. Federal Reserve Chair Janet Yellen, for instance, last week cited the potential for a Brexit as a reason for leaving U.S. interest rates untouched.
Brexit raises "the risk of uncertainty" for the U.S. economy, Greg Daco, the head of U.S. macroeconomics at New York-based Oxford Economics, told CBS MoneyWatch earlier this month. "Businesses don't like to not know what is happening. The more uncertainty, the less likely they are to invest."
Beyond what looks like a serious hit come Friday to many U.S. stocks, Brexit could dent American corporate earnings over the next few years. Companies in the S&P 500 get an aggregate of 2.9 percent of revenue from the U.K., No. 3 after the U.S. and China, according to an analysis from Factset.
The S&P sectors considered most at risk are energy, information technology and materials, which get the most revenue from the U.K. On top of that, 30 companies in the S&P 500 get more than than 10 percent of their revenues from the U.K., including Newmont Mining's (NEM) 64 percent and Molson Coors Brewing's (TAP) 34 percent.
Large U.S. banks could also be hurt, due to higher costs and weaker capital markets activity, analysts at Keefe Bruyette & Woods said in a recent report. Earnings could be hit by as much as 6 percent this year.
Brexit's passage will almost surely weigh on the Federal Reserve's decision-making about raising interest rates, as it did in its most recent meeting. The Fed's next rate-setting meeting comes in July, which means Brexit could push the possibility of the next rate hike to September, Daco of Oxford Economics said.
While low interest rates are good for the economy because they make it cheaper to borrow money, they also signify that underlying issues are hampering the economy. If U.S. growth were stronger, in other words, Brexit would be a "nonissue" for the Fed's decision on interest rates, Daco said.
All in all, Britain's decision to abandon the EU will likely have negative consequences for Americans, according to Aaron Klein, a fellow of economic studies at Brookings, and his colleague DJ Nordquist.
"Our economy does not need additional global headwinds," they wrote in a research note. "Global weakness and financial market uncertainty is not the recipe for stronger economic growth."
Yet the tough thing is, there's little if anything the individual investor can do about it Friday or next week or probably even the weeks after. Sales of stocks and bonds take place in an instant because today's markets are ruled by sophisticated computer-trading programs that do what they do faster than any human can possibly attempt.
The classic advice from financial advisers for dealing with a potentially horrific day in the markets like Friday? Do nothing. As tempting as it might be to sell, do not sell. This too shall pass, goes the thinking based on nearly 100 years of tracking the inevitable ups and downs of markets. Recall that stocks ultimately recovered and grew again after the bloodbath of 2008 that cost investors trillions. Just as there'll always be an England, there'll always be another day to invest in the markets.