“Well, Okie use’ta mean you was from Oklahoma. Now it means you’re a dirty son-of-a-bitch. Okie means you’re scum”
– John Steinbeck, “Grapes of Wrath”
After telling migrants from fellow EU countries Spain, Poland, Italy, etc. “you’re not welcome here”, BREXIT campaigners want the world’s manufacturing and financial services companies to believe a favored commercial relationship will be the outcome of the EU negotiations. As Americans, it is hard to fathom why a state would vote to change its laws to bar children from the other 49 from working there. Yet that appears to be what England has chosen to do. New Prime Minister May is known for hard views over free movement of labor.
Economically the BREXIT comps get worse. In the trade math of ‘who needs who more’, Britain suffers. Europe represents 50% of Great Britain’s exports, and a large % of its exports is services. Outside Europe its largest services export partner is the U.S., and one suspects much of that is for conducting business in the EU. With limited or impaired access to EU open markets, Britain’s financial and business services may lose its competitive value. Financial Services is an easily relocated & replaceable industry for moving to EU domiciles. Banks already move whole trading floors in a weekend — screens, cables, tables, files, and all. An analyst queues in the Madison Avenue Starbucks on Friday morning, and the St. Petersburg Starbucks drive thru Monday morning on the way to the new Tampa office. It is no wonder there’s reports of a ‘remain’ movement in London contemplating setting up a new ‘city state’ if Britain goes through with it.
So, it is not hard to see that as UK goes through BREXIT that its economy will be dislocated and emerge smaller. To paraphrase one UK pundit, “we voted up for little England, and down for Great Britain’.
While political figures in UK report to voters there’s time to negotiate a better deal, the credit markets are not waiting for tea. UK property funds have frozen withdrawals. Bloomberg reports demand and pricing for credit protection on UK banks and retailers has already risen by almost 200BPs since the announcement. Amount of credit protection on Rolls Royce, Britain’s largest manufacturer, rose 6x over prior week.
The reality is that there is no meaningful way for valuing UK companies. Methodologies require rules. Until then acquisitions are on hold. Insurance prices on UK companies are up. Credit is shrinking. As the economy slows, credit will tighten on those companies and sectors more peripheral. The longer negotiations over rules take, the longer the uncertainty, the worse economically for UK companies and citizens.
Is there a way to value in the meantime? Pragmatically one is tempted to say valuations should be 1:1 — whatever savings UK thought were achievable via BREXIT, in the end the EU will ‘get theirs’.
1:1. A fantastic offer. UK leaders would leap across the table and kiss the Europeans on both cheeks. However it is reasonable to expect 1:1 won’t be forthcoming.