In less than 48 hours, we will know whether the U.K. has decided to leave, or remain in, the EU. Today, the Dow and S&P 500 are rallying on renewed optimism that the "stay" campaign will prevail. While there’s nothing wrong with being hopeful, I want to make sure we’re prepared for either outcome. As I mentioned last week, the potential Brexit has profound consequences for global financial markets; this includes the U.S. stock market.
If the British decide to leave the EU, there will be four immediate outcomes:
First, both the British pound and the euro will fall. As a result, both the Bank of England (BOE) and the European Central Bank (ECB) will have to step in to shore up their respective currencies.
Second, I’d expect the U.S. dollar to rally on June 24. Already, the greenback has been strengthening in recent weeks in anticipation of the vote.
Third, energy and commodity prices will fall. Any significant rally in the U.S. dollar will squelch commodity price inflation, because commodities are priced in dollars. As a result, I expect energy prices to peak sooner rather than later, and that we’ll see a selloff in most energy and commodity-related stocks.
Fourth, the stronger U.S. dollar will also pinch the profits of multinational companies that operate around the globe. This fourth point is especially important, considering that over half of the S&P 500’s sales originate from outside the U.S. And, for those U.S. companies that do a lot of their business in Europe, this isn’t good news.
So, if you’re currently owning any stocks with exposure to Europe (especially U.S.-based multinationals), now is the time to review those holdings. To get you started, I’ve selected 10 big blue chips that have a strong presence in Europe. Take a look at the list, and if you’re currently holding any of these stocks, you may want to consider trimming or selling your position.
|Ticker||Company Name||Total Grade||Quantitative Grade||Fundamental Grade||% Europe Sales|
|UTX||United Technologies Corp.||D||D||C||27%|
Regardless of the outcome, I will post an update on the Brexit vote on Friday. So please stay tuned!