The short answer to the first question is that we don’t know, nor do we believe that anyone else does. The current situation is that the United Kingdom is scheduled to leave the European Union on March 29. To that end, the British Prime Minister negotiated with the EU a package of new rules—a “deal”—to govern cooperation after Brexit. However, the British Parliament, which must approve any deal for it to be binding, rejected it.
Now there is a wide array of potential outcomes:
- A new deal acceptable to both sides negotiated and approved by March 29.
- A “no-deal” Brexit on March 29.
- A delay of Brexit if the UK requests it and the EU approves it.
Some still wonder if Brexit could be stopped. After the public referendum in 2016, however, the UK Parliament did make the British exit from the EU a law, so Brexit can be undone only if Parliament rewrites the law, which it is unlikely to do without a new public mandate. Therefore we could even see a new referendum on the issue before March 29. Again, we simply do not know how this will evolve.
We do, however, have a strong opinion on the effect of Brexit on our international portfolios.
The Brexit issue has been more problematic for the UK domestic economy than it has for any other part of the world, and we believe that will continue to be the case. We have very little exposure to the UK domestic economy in our international equity portfolios. The UK companies that we own are global, with suppliers, customers, and production facilities around the world. To the extent that Brexit will require some adjustments in their operations, these companies may be no more advantaged or disadvantaged than their competitors who also do business in the UK and Europe.
The Benefits of a Diversified Business
Companies with geographically diversified businesses are used to working with widely varied and continually evolving regulations on everything from product safety to packaging, advertising, labor, and waste disposal. They also work in a wide range of currencies and make decisions as to whether and how much to hedge them. They routinely decide whether to fulfill their supply needs with short- or long-term contracts, whether or not they should buy the commodities they require in the spot or forward markets, whether to stockpile components, and so forth. In addition, these companies all have manufacturing facilities in various countries exporting their products all over the world.
Within this context, the issues that would arise as a result of a British market separation from the EU—such as changes in labor availability, environmental regulations, packaging requirements, and currency movements—are issues they are used to dealing with every day. Brexit is unlikely to be particularly onerous to them as a group.
Still, for those multinationals that are domiciled in the UK, their share prices may experience short-term pressure, depending on the form of the deal or no deal. However, as we saw in the wake of the Brexit referendum in 2016, that effect was short-lived. Additionally, while the UK-domiciled companies we own would not be impacted by each issue in exactly the same way, the degree to which they would be affected by their particular combinations would be quite similar. None are likely to be particularly advantaged or disadvantaged. (For example, both American Proctor & Gamble and Anglo-Dutch Unilever would need to adjust manufacturing, testing, and shipping.)
A British exit from the EU would inevitably require these companies to adjust their operations, but they are accustomed to such changes as a natural part of their business. Indeed, many have already prepared for short-term disruption. A smattering of examples of the measures they have taken—which vary widely, depending on their particular needs—range from relocating quality testing divisions, to stockpiling supplies and end-products in various markets, to establishing legal entities in various jurisdictions to minimize time required to respond to the particular form Brexit takes if and when it finally happens. Over the long term, we think these companies will be able to take Brexit in stride.
The mention of specific companies or sectors does not constitute a recommendation by any particular fund or by OppenheimerFunds, Inc. Certain Oppenheimer funds may hold the securities of the companies mentioned. It should not be assumed that an investment in the securities identified was or will be profitable.
Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, regulatory and geopolitical risks. Emerging and developing market investments may be especially volatile. Eurozone investments may be subject to volatility and liquidity issues.