About this episode:
Headlines have been dominated with news about “Brexit,” the vote on the referendum for the United Kingdom to leave the European Union. But what exactly does Brexit mean for us here in the Beehive State? In this episode of UB Insider, Dave Pierce of GPS Capital Markets shares his ideas. Subscribe or download this episode oniTunes and Stitcher.
Lisa Christensen: Hello and welcome to UB Insider. I’m Lisa Christensen, online editor at Utah Business magazine. Over the last week, headlines have been dominated with news about Brexit – the vote on the referendum for the United Kingdom to leave the European Union.
After the results of the vote came out last Thursday night, the value of the pound dropped, Prime Minister David Cameron announced that he would be resigning, and stocks around the world plummeted. Meaning that even here, thousands of miles away we’re feeling its repercussions. But what exactly does Brexit mean for us here in the Beehive State? Dave Pierce of GPS Capital Markets has a few ideas. Thanks for coming in Dave.
Dave Pierce: Thank you, so much.
Lisa Christensen: So first off, how will Brexit impact the United Kingdom and the European Union?
Dave Pierce: Well, obviously it’s going to impact them much more than it is going to impact us. Let’s start with how it’s going to impact the European Union first. The idea that one of the countries that is a part of this union that they put together over the last 40 years wanting to leave is a big deal. The United Kingdom, the people that live there have voted to leave. It has really sent shockwaves across the European Union. In fact, since this has happened, there are five other countries that have suggested that they might want to leave as well. Which is a big deal. And so the idea that the European Union is this really strong, cohesive bond of countries is really starting to fall apart a little bit.
Lisa Christensen: And this is a little bit different than a couple of years ago when Greece’s market was so terrible and it was being discussed about, you know, whether they should be forced out.
Dave Pierce: Yeah. And Greece is a little bit different situation because Greece is what we call a net receiver of funds from the EU. In other words, the other countries that put money in, Greece is receiving a lot more in benefit than they are paying out into the European Union. Whereas, the United Kingdom is just the opposite. They are one of the largest contributors. And so every week they contribute hundreds of millions of dollars into the EU, more than they receive back.
So there are some specific things like Greece that are a little bit disadvantageous, as well as advantageous for them being in the EU. For instance, we mentioned the subsidies and the benefits that Greece gets, and the loans that they get from the European Union. That benefits them. The thing that really doesn’t benefit them is being a part of the euro currency. And being a part of the euro currency, one of the things that they don’t have anymore, is it used to be, when they were the Greek drachma, they could devalue their currency. You’ve heard of countries doing that. And when you make your currency worth less money, all of a sudden, it’s cheap to go on vacation in Greece. It’s cheap to buy products from Greece. We can buy olive oil. We can buy all of the different things that we think of from Greece for a lot less money. That stimulates their economy by having more money flow into the country from outside. Now that they’re a part of the European currency unit, they can’t do that. There’s no way for them to stimulate their economy in that way. So their economy is still really, really struggling. A lot of their businesses, traditional businesses, have just disappeared because they can no longer support themselves given the value of the currency.
Now, the UK, is a little bit different. They are not part of the euro. They have their own currency. They have the British pound. So why do they want out? It’s not because they can’t devalue their own currency. It’s not because their economy’s not strong, because it’s really, really strong. Probably the strongest currency in all of Europe. There’s a couple of issues that they don’t like about being in the EU. We’ve heard about immigration. If you’re one of the European Union countries, people from any of the other EU countries can come freely to your country, live, work, immigrate, whatever they want to do, without any penalties. It would be as if the United States and Mexico, let’s say, were in a union like that. Someone from Mexico or Canada could just move to the United States and wouldn’t have to worry about the visas or anything like that. They could just freely move here and have jobs. It has caused a lot of turmoil in the UK because there’s so many people that want to move there.
The other thing that has been a real big deal with the European Union is they pay so much money into it and they get no representation. All of the laws that are made in the EU are passed by, basically government bureaucrats. And even though they have a congress and they vote on laws, those votes are completely non-binding. People are kind of tired of somebody that is not part of their country, not a representative of themselves just making decisions, basically. So the idea that, that’s kind of why the UK wants to get out. It’s going to be a struggle for some countries if this European Union breaks up. There are some countries that are going to be really hurt. Other countries, like I think the UK is going to be ok even though we’ve seen big repercussions in the marketplace.
Lisa Christensen: Sure. And even over here, stocks have plummeted and their pound is valued significantly less than it was a week ago.
Dave Pierce: It is. Yes. It dropped about 12% initially.
Lisa Christensen: So why did it cause the pound to drop and stocks to plummet?
Dave Pierce: Sure. The first reason is, nobody expected it to pass. That really is the big thing. Everybody was betting on it going the other way. Even people in England. Even people that voted to leave the EU, they didn’t think it was going to pass. And they just thought, well I’m just going to go vote with my heart. And a lot of those people are saying, oh crap. I’m not sure I really wanted this to happen. I just wanted my voice to be heard. When things that are unexpected happen in the market, we see big movements.
Think about London. London is the biggest financial market in the world. You’ve got, behind that you’ve got New York and Singapore and Hong Kong, are some big financial markets, but London is it. When we walk about the heart of the currency markets, the heart of the banking and financial industry, London is where it’s at. And so it’s a huge market and people were really worried about how this was going to impact global corporations. Because there’s a lot of global companies that have their head, at least their European headquarters in London.
Right now, if you’re in London and operating there, you can, we call it passport. In other words, you can do business in any of the European Union countries just as if you’re doing business in the UK. Well if all of a sudden that goes away, and you don’t have operations and licensing and everything like that set up in these other countries, you’ve got to pack up and move. You’ve got to have operations in these other countries. And that can be very damaging for big multinational corporations. So that’s why I think, initially, there was some huge drops in the value of some big global companies. Because people were worried about how they would be able to cope with this. How quickly they would be able to move. And how they would be able to change their strategy going into Europe. Does that make sense?
Lisa Christensen: Yeah. Sure. And Utah, we pride ourselves here on having a very healthy export market and being involved internationally. Should Utahans be concerned about Brexit for that reason?
Dave Pierce: Yeah. A little bit. When you talk about Utah being a big export market, we are. And the UK is actually one of our largest markets. We send a lot of stuff there. And I would tell you that in Europe, London is, well London and the United Kingdom are really where American and Utah companies in particular go to set up headquarters. Now you ask, why? Well, the US and the United Kingdom have a very special relationship. We’re very friendly with each other. And guess what? They speak English. They speak English really well. And so I think just by default, a lot of people feel comfortable going there. A lot of our, I guess you’d say, ancestors traditionally came from that part of the world, so people feel an affinity with England.
In Utah in particular, where we are a big export market, if you think about it, you’re a US company, you’re a Utah company right? And you sell your product into the United Kingdom. And let’s say you’ve got a product that you sell for £1,000. Okay? A week ago, when you sold that product for £1,000, you could expect about $1.50 back. Today, you’re getting $1.35. All of a sudden, the amount of money you’re getting back on every sale, instead of getting $1,500, you’re getting $1,350. That’s $150 right off the top of your revenue. And a lot of companies operate on 10-15% margins. All of a sudden that margin disappeared. And so a place where they’re actually making money, they could now be losing money on the products that they’re selling. So that’s really concerning. And you can’t just automatically, overnight, just snap your fingers and raise your prices 10 or 15%. Because if you do that, what’s going to happen? People are going to stop buying. You’re less competitive in the world. So it’s made a big difference to a lot of companies in Utah.
Lisa Christensen: It sounds like a catch-22 there.
Dave Pierce: Yeah. A little bit. One of the things that we did with our companies is we talked to all of them on the phone before this happened. In the weeks building up to that. And what we spend a lot of our time with companies doing is helping them, what’s called, hedge. In other words, if you know that you’re going to have £10 million in sales over the next 12 months, we can actually go and lock the exchange rate in today. It doesn’t matter what happens to the currency markets in the future, you’re guaranteed that you’re going to get those exchange rates. So a lot of the companies that we do business with took advantage of doing that and actually locked in and protected themselves against currency movements. Just like this. Kind of like buying an insurance policy. And so a lot of our companies really are not feeling the heat of this because they were smart enough to take the time and the effort to go out and put those kinds of policies in place.
Lisa Christensen: What about for companies who didn’t put those policies in place? What can they do?
Dave Pierce: Man. I’ll tell you. The day after the fallout, we were up 24 hours a day. We were up watching this as it all happened. The day after, the aftermath of this was really quite ugly. We probably, it was easily one of our busiest trading days in years. Because there were a lot of companies that didn’t do anything and were panicking. And were trying to get things done. And we heard, man. I was really stupid. I should have done something like you guys told us. We heard that all day long. It was really quite dramatic.
The other thing that was really tough is a lot of banks stopped trading in the pound. A lot of banks stopped trading in everything because the perception was that this was going to be a dramatic event. Everybody knew that this was going to be dramatic if the vote went one way or another. So the margins were really wide, because the trading was really thin. So there was lots of demand, and not a lot of people wanting to come into the market. It was kind of a perfect storm, if you will.
Lisa Christensen: It sounds like a lot of the storm was caused by, people just not knowing what would be coming and how this will affect things in the long term.
Dave Pierce: Yeah. That really is true. Like I said earlier, uncertainty really plays a big part of when you look at markets becoming really volatile like that. And it played over, not into just companies here in Utah that are selling product overseas, but, you know, every one of us should know if we’ve got money in a 401k or an investment account. It really played some havoc in the stock market as well with the values that we had, you know, in our savings. So that impacts even retired people that may not be a business owner, or someone selling overseas. It can really impact everybody.
Lisa Christensen: I think most people do have stocks. Even I have stocks. So how can people, you know, just regular people with stocks, how can they manage risk during this time? Or what advice do you have?
Dave Pierce: Yeah. That’s probably the harder thing to do. Because if you’re like me, most of my money is in my 401k plan. I don’t manage my 401k plan. I have, you know, Fidelity or somebody like that is where my plan sits, right? And those professional money managers are the ones that are managing my portfolio of different stocks. Probably because I’m lazy and don’t want to do that myself. Right? I think most people fall into that category where they just let somebody else manage their money for them. They buy mutual funds or something like that. It’s hard for the individual to do something like that. The smartest thing, I guess, if you’re real risk adverse, is to, when you know something like this is coming up, just take your money out and put it in cash. Sit on the sidelines for a while. Me? I did nothing.
We saw big reverses in the stock market. But if you look today, we’ve already gained back about 50% of what we lost in those first couple of days. I think that there was a lot of panic. And I think that when people start to think about it on a more rational basis, we’re seeing the market rebound back to previous levels. It’s not going to come all the way back I don’t think, immediately, especially on the currency side. The pound is still going to get hit. But I think on the stock side we’ll see those come back to more rational levels.
Lisa Christensen: So it sounds like it’s a temporary thing that will pretty much repair itself if people ride it out.
Dave Pierce: Yeah. I think so. I think now, if you’ve done nothing, that’s the best scenario. Don’t panic now. Don’t pull all your money out of the stock market today. I don’t think that that’s where you want to go. I think that you can just ride it out and I think we’re going to come back.
Lisa Christensen: Speaking a little bit more about uncertainty and speculation for the future, I don’t know if you remember a couple of years ago, Scotland held its own vote about whether to, you know, take back its country and leave the UK, which narrowly failed by a very narrow margin. They decided to stay with the UK. But after this I’ve heard that they are reconsidering having that vote again so that they can stay with the EU or go back with the EU. Do you think that that will happen? What impact would that have on the EU as a whole?
Dave Pierce: You know, there are a lot of knee-jerk reactions going on right now. And a lot of people panicking over different things. Here’s what you need to understand about the UK. The economic hub of the UK is the city of London. That’s where most of the economic activity takes place in the whole country. Up in Scotland, the people are generally much poorer and there’s not nearly as many jobs up there. There’s a lot more people unemployed and a lot more people receiving government benefits. And a lot of those benefits come from the European Union. It scares those people a lot to think that those benefits they’re getting from the EU won’t continue. And so you can really understand why they feel that way. They feel much closer to the European Union than people do in the rest of the country because they receive benefit from that.
I think that when people look at how they vote and think about things, their selfishness goes into it. We all want what’s best for us. Not necessarily what’s best for the next door neighbor if it’s going to impact me negatively. I think some of that’s going on in Scotland right now. My personal feelings are: I think that after a few months, things are going to settle down. There really is a big divide between, and quite a lot of animosity actually between the British and the Scots. They truly identify as completely separate people. They are their own people. If you go to Scotland, the British pound bills are different in Scotland than they are in England. They actually are issued by the Bank of Scotland and they have different pictures on them. There’s a real difference in culture and personality and even the way that they speak. So there’s a real affinity to be Scots.
Lisa Christensen: From what you’ve been saying, it sounds like most of this will blow over. But it also sounds like kind of a lot is dependent on what happens next. What kind of factors with the EU and with the UK would cause more long lasting effects for us here?
Dave Pierce: Sure. Let’s talk a little bit about this referendum. It is not a binding vote. It was a referendum. In other words, the government went to the people and said, what do you think we should do? And the people voted and it was 52% to 48%. 52% of the people in the country said, well I think we should be out of the EU. David Cameron has resigned, or he has announced that he is going to resign. It’s a couple months away from that happening. I think that we’re, they’ve started, he said he’s going to start the process of exiting. He really didn’t want to go. He really wanted to stay in. And I’m not sure if he says he’s going to start that process to panic people more so that people throw up their arms and say no, not yet, just kidding! Or if he really wants to just do the will of the people. I get the feeling that it’s more, he wants people to panic a little bit about this. Say, what have we really done? Stop. Never mind. So that’s one of the things that I think we need to think about.
It’s going to be a couple years before this all happens. It takes a while to have this put in place. It will be a couple years. And by the time a couple years is out, that gives companies, if they need to say, open up headquarters in Germany or France or something like that. It gives them plenty of time to do that. And it gives them time to negotiate trade agreements and things like that and have them put into place. The other thing you’ve got to think about is, what happens if the average person in Germany or France or Italy that’s part of the European Union just says, you know what, I hate those British because they left. And they are making our lives harder. We’re not going to do business with them anymore. Just on principle. Just because I don’t like them anymore. There could be some of that. Even if they negotiate trade agreements that directly mirror what they’ve got going on right now, there could be some backlash towards companies in the UK. We haven’t seen any of that yet in our business. And when I talk to the guys in our London office every day, they’re not seeing any of that yet.
We’ve got a lot of clients throughout the European Union. They’re still comfortable doing business with us. But it’s a possibility. So the other thing that we need to worry about is the backlash. I talked about that a little bit. What if some other countries decide that they want to leave as well? If we get a few more countries leaving, it might snowball. And if it snowballs, who knows what could happen. It could be, I don’t want to use the word catastrophic, but I guess I just did. It really could for some of the smaller countries that are net receivers of benefits from the EU…
Lisa Christensen: Such as Greece.
Dave Pierce: Yeah. Such as Greece or Italy that are more dependent. And what happens if all of a sudden that well of funds dries up? Are they going to have to declare bankruptcy as a country? They aren’t going to be able to pay back their loans. What do they do? I mean, it could be, financially pretty devastating to different parts of the European Union.
Lisa Christensen: Alright, so the takeaways for Brexit right now are don’t panic, ride it out. Unless something worse happens.
Dave Pierce: Yeah. And it could. We could see somebody jump in right away and decide that they want to make a big change, yeah.
Lisa Christensen: Alright. Well I guess we’ll just have to wait and see.
Dave Pierce: Yeah.
Lisa Christensen: Alright, well thanks so much for talking to us today. We really appreciate your insight.
Dave Pierce: Thanks for having me down. I appreciate it.
Lisa Christensen: Thanks also to Pat Parkinson for production help, as well as Adva Biton. Tell us what you think at firstname.lastname@example.org or on Facebook, Instagram or Twitter. Thanks for listening and have a great day.