U.S. companies could see their bottom lines slashed if the U.K. votes to leave the European Union in a so-called Brexit referendum this summer, according to Bank of America.
Fears that the Brits will choose to exit the bloc it’s been a member of for more than 40 years have already sparked turmoil in pound trade GBPUSD, +0.3820% and European stock markets SXXP, +0.72% But U.S. investors should brace for the vote too, said Joseph Quinlan, head of market & thematic strategy Bank of America Global Wealth & Investment Management.
“Given the prominence of the U.K. in driving U.S. global profits, any talk or action that leads to the severing of U.K.-EU ties carries significant risks to the bottom line of corporate America,” he said in a report out late Tuesday.
“A Brexit would squeeze the affiliate earnings of numerous U.S. multinationals strategically ensconced in the United Kingdom, and force many companies to rethink their overall EU strategies,” he said.
The impact of a vote to leave the union is being widely debated this week. U.K. Prime Minister David Cameron struck a deal with other European leaders last Fridayto change his country’s membership with the EU. He hopes the deal is enough to convince the British public to vote for staying in the bloc at the in/out referendum on June 23. Cameron argues Britain is better off staying in the EU, as a goodbye would be a “leap into the dark”.
However, supporters of the leave campaign — including prominent British politician and London Mayor Boris Johnson — reason the EU is eroding the U.K.’s sovereignty and costs U.K. citizens too much money.
In terms of the impact on the U.S., it’s hard to find any positives in the case of a Brexit, Quinlan said. He explained that for decades Britain has served as a “strategic gateway” to the wider European Union, with U.S. multinationals using the U.K.’s access to the wealthy EU as a “profit-generating strategy.”
Since 2000, almost 9% of Corporate America’s global foreign affiliate profit has come from the U.K. That’s only topped by the Netherlands, where there’s a strong presence of U.S. holdings companies because of tax purposes. The output of U.S. affiliates in the U.K. alone was $153 billion in 2013, which is about the same size of Vietnam or Ukraine’s gross domestic product, the BofA note said.
“Whatever the metric—total assets, R&D expenditures, foreign affiliate sales and even affiliate employment—the United Kingdom is a key pillar of corporate America’s global infrastructure and a key cog in the global competitiveness of U.S. firms,” he said.
Aside from the subsidiary profits, direct investments into the U.K. has also been significant in recent years compared with other large economies. U.S. corporate investment into Britain totalled $588 billion in 2014, more than double the amount invested into South America, the Middle East and Africa combined, according to the BofA report. In comparison to China, U.S. corporate stakes in the world’s second-largest economy were just 11% of the investments into the U.K..
“Wealthy consumers, respect for the rule of law, the ease of doing business, credible institutions, membership to the European Union—all of these factors and more have long made the U.K. a more attractive place to do business for American firms than either China or India,” Quinlan said.
“In the end, U.S. companies from all stripes—finance, healthcare, autos, chemicals, food and beverages, technology, energy—have made a huge bet on Britain and the U.K. over the past few decades…But with Britain now debating whether or not to leave the union, and set to vote on June 23rd, the question is this: Is corporate America’s big bet on the U.K., in general, about to go bad? It’s a question U.S. investors need to keep top of mind in the months ahead,” he added.
This story originally appeared on MarkeWatch by Sara Sjolin on February 24, 2016. View article here.
