As we enter June, attention is turning toward the “Brexit” referendum, scheduled to be held in the United Kingdom on June 23. Investors are asking how likely is it that voters will choose for Britain to exit the European Union and what the investment implications might be if they do.
In my opinion, it is relatively unlikely that we will see a vote for Britain to withdraw from the EU. I don’t have a crystal ball, but I do look at betting site odds. (As every investor knows, nothing focuses the mind like putting money on the line.)
The aggregate odds on sites where people can bet on the outcome of the vote are tilted 75%-80% against an exit.1 This is significantly higher than early March, when odds were running 60%-65% against.
However, as any investor can tell you, hoping for the best is fine, but it is best done in conjunction with thinking through the worst. What would be the implications of a British exit from the EU on companies operating in the UK and Europe?
What a Brexit Means for Companies in the UK and Europe
A quantitative answer to this question is not a practical possibility. Each company has its own idiosyncratic combination of production centers, client bases, operating currencies, labor force distribution, degree of regulation in end markets, and pricing cycles for goods and services. The end result is impacted by all of these. The complexity of measuring these factors for each company in the market and rolling the results into a few aggregate figures renders the exercise impossible. And that is before the companies take any action in response to the potential impact on their individual businesses. This means a quantitative answer to this question really is out of the question.
How a Brexit Might Impact Our Portfolio
However it is possible to think through the implications for individual companies that we own in the portfolio. We know their businesses in depth, have had a long history with many of them, and have observed in the past how their respective management teams respond to shifting market conditions. So let’s think through some examples.
We own Reckitt Benckiser2 and Unilever.3 Both are global consumer staples companies with well-known brands in personal and household care. In those areas, their primary competitors are two U.S. companies: Proctor & Gamble and Colgate-Palmolive. Reckitt employs nearly 40,000 people in over 60 locations, roughly 20 of which are in Europe and the UK.4 Unilever is an even larger company with 172,000 employees and 261 manufacturing centers around the world, as well as operating subsidiaries in a few key emerging markets.5 Proctor & Gamble has 129 manufacturing sites around the world; 100 of them in 38 countries outside of the U.S.6 Colgate Palmolive has a similar profile.
My point here is that all of these companies operate businesses with a high degree of geographic diversity. As a result, they work 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 also must decide whether to fulfill their supply needs with short- or long-term contracts, and whether or not they should buy the commodities they require in the spot or forward markets.
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. Furthermore, while the 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 would be particularly advantaged or disadvantaged.
A British exit from the EU would inevitably require these companies to make some adjustments in their operations, but they are accustomed to such changes as a natural part of their business. In a nutshell they would take a Brexit in stride.
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21.16% of the Oppenheimer International Growth Fund is invested in Reckitt Benckiser Group PLC as of 4/30/16. Source: Morningstar.
30.96% of the Oppenheimer International Growth Fund is invested in Unilever PLC as of 4/30/16. Source: Morningstar.
The mention of specific companies does not constitute a recommendation by any particular fund or by OppenheimerFunds, Inc.
These views represent the opinions of OppenheimerFunds and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.