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How to Prepare for a Potential Brexit

As I write this, I feel that investors are clearly getting nervous about what’s going to happen across the pond on June 23. As you’ve likely heard, just over a week from now, Britain will have a referendum on whether to leave the European Union (EU).

We’ve known about the potential “Brexit” for a long time now, but recent opinion polls suggested that it’s now likelier than ever before. I want to make sure that we’re all prepared for either option. So, in today’s blog let’s discuss what a “Brexit” would do to the financial markets.

I’ve broken it down into four predictions:

  1. Both the British pound and the euro will fall. Both the Bank of England (BOE) and the European Central Bank (ECB) will have to step in to shore up their respective currencies.
  2. The U.S. dollar will rally. The beneficiary of a Brexit is expected to be the U.S. dollar, so be prepared for a possible U.S. dollar rally on June 24th.
  3. Energy and commodity prices will fall. Any significant rally in the U.S. dollar will help to squelch commodity price inflation; in fact, it has already caused crude oil prices to peak near-term.
  4. Energy and commodity-related stocks will suffer. By extension, a strong U.S. dollar spells further trouble for frothy energy and commodity-related stocks. While these stocks lead the stock market after the mid-February turmoil, a change in market leadership is underway.

To be sure, a “Brexit” would be a major blow to the EU. The U.K. has the fifth largest economy in the world, and the second largest economy in the EU. The U.K. also makes the top ten on both imports (fifth) and exports (ninth).

If the U.K. leaves the EU, it will also impact U.S. trade. As such, it would put additional pressure on the Fed to leave interest rates unchanged. The U.S. dollar is already strong relative to other currencies, which has prompted many of the U.S.’s largest economic partners to urge the Fed to keep rates low.

So, if you’re a stock investor, you may want to stay away from most energy and commodity-related stocks for now. You should also limit your exposure to multinational companies that do a lot of business in the U.K. or the EU. That’s because the strong U.S. dollar puts pressure on these international sales.

In the meantime, I’ll continue monitoring the situation as we approach June 23. I’ll have an update for you on the blog once we know what Britain’s voters have decided.

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