Markets

Why a Brexit Could Be a Losing Proposition for Everyone

Published

8 years ago

February 24, 2016

Jeff Desjardins

Why a Brexit Could Be a Losing Proposition for Everyone

After two days of intense negotiations, British Prime Minister David Cameron has proposed a new agreement that could allow Britain to stay in the European Union. Although not all of his demands were met in full, the potential deal focuses on migrant workers, protecting the pound and London’s financial sector from regulations, sovereignty, and competitiveness.

It may be just enough of a carrot to dangle in front of the “Euroskeptics”, or Brits that are skeptical of the benefits that Britain receives from EU membership.

However, the split between “stay” and “leave” is still very even according to polls:

Polls: Stay or Leave Europe

With polls close and the “Vote Leave” campaign now in full gear for the referendum on June 23, investors around the world are trying to figure out the potential economic and political impact of a British exit from the EU.

Here’s What’s at Stake

The Bertelsmann Foundation, a non-profit foundation from Germany dedicated to European unity, has come up with a fairly compelling case against a Brexit.

Shown in today’s infographic, the impact of the UK leaving the economic union creates a situation where everyone loses.

While its true that the UK would have greater control over its own immigration and regulations, the downside is largely economic. Britain could avoid making payments to the EU budget, which works out to £350 million per week, but this would be likely outweighed by the increase in trade barriers. Currently 45% of the UK’s exports go to Europe, and without direct access to the single market, the cost of both imports and exports would likely go up.

The costs of trade policy isolation affect the United Kingdom, where GDP could drop from 0.6% to 3% lower by 2030, compared to if it remained in the EU. Bertelsmann warns it could be even worse once the effects of economic isolation factor into investment and innovation behavior, with the GDP dropping up to 14%.

Britain is not the only country that would be affected. As a result of a Brexit, the GDP per capita of Ireland (-2.66%), Germany (-0.33%), Netherlands (-0.35%), France (-0.27%) and Spain (-0.32%) could all also be impacted.

Does the financial community share these concerns? If the pound is any indication of Brexit fears, the currency is currently trading at seven-year lows.

GBPUSD

Related Topics:united kingdom european union brexit trade eu britain economic union

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Markets

The European Stock Market: Attractive Valuations Offer Opportunities

On average, the European stock market has valuations that are nearly 50% lower than U.S. valuations. But how can you access the market?

Graphics & Design

Alejandra Dander

An infographic showing that compared to North American and Asian stocks, the European stock market has lower or comparable valuations and low-to-moderate correlation.

European Stock Market: Attractive Valuations Offer Opportunities

Europe is known for some established brands, from L’Oréal to Louis Vuitton. However, the European stock market offers additional opportunities that may be lesser known.

The above infographic, sponsored by STOXX, outlines why investors may want to consider European stocks.

Attractive Valuations

Compared to most North American and Asian markets, European stocks offer lower or comparable valuations.

Index	Price-to-Earnings Ratio	Price-to-Book Ratio
EURO STOXX 50	14.9	2.2
STOXX Europe 600	14.4	2
U.S.	25.9	4.7
Canada	16.1	1.8
Japan	15.4	1.6
Asia Pacific ex. China	17.1	1.8

Data as of February 29, 2024. See graphic for full index names. Ratios based on trailing 12 month financials. The price to earnings ratio excludes companies with negative earnings.

On average, European valuations are nearly 50% lower than U.S. valuations, potentially offering an affordable entry point for investors.

Research also shows that lower price ratios have historically led to higher long-term returns.

Market Movements Not Closely Connected

Over the last decade, the European stock market had low-to-moderate correlation with North American and Asian equities.

The below chart shows correlations from February 2014 to February 2024. A value closer to zero indicates low correlation, while a value of one would indicate that two regions are moving in perfect unison.

	EURO STOXX 50	STOXX EUROPE 600	U.S.	Canada	Japan	Asia Pacific ex. China
EURO STOXX 50	1.00	0.97	0.55	0.67	0.24	0.43
STOXX EUROPE 600		1.00	0.56	0.71	0.28	0.48
U.S.			1.00	0.73	0.12	0.25
Canada				1.00	0.22	0.40
Japan					1.00	0.88
Asia Pacific ex. China						1.00

Data is based on daily USD returns.

European equities had relatively independent market movements from North American and Asian markets. One contributing factor could be the differing sector weights in each market. For instance, technology makes up a quarter of the U.S. market, but health care and industrials dominate the broader European market.

Ultimately, European equities can enhance portfolio diversification and have the potential to mitigate risk for investors.

Tracking the Market

For investors interested in European equities, STOXX offers a variety of flagship indices:

Index	Description	Market Cap
STOXX Europe 600	Pan-regional, broad market	€10.5T
STOXX Developed Europe	Pan-regional, broad-market	€9.9T
STOXX Europe 600 ESG-X	Pan-regional, broad market, sustainability focus	€9.7T
STOXX Europe 50	Pan-regional, blue-chip	€5.1T
EURO STOXX 50	Eurozone, blue-chip	€3.5T

Data is as of February 29, 2024. Market cap is free float, which represents the shares that are readily available for public trading on stock exchanges.

The EURO STOXX 50 tracks the Eurozone’s biggest and most traded companies. It also underlies one of the world’s largest ranges of ETFs and mutual funds. As of November 2023, there were €27.3 billion in ETFs and €23.5B in mutual fund assets under management tracking the index.

“For the past 25 years, the EURO STOXX 50 has served as an accurate, reliable and tradable representation of the Eurozone equity market.”
— Axel Lomholt, General Manager at STOXX

Partnering with STOXX to Track the European Stock Market

Are you interested in European equities? STOXX can be a valuable partner:

Comprehensive, liquid and investable ecosystem
European heritage, global reach
Highly sophisticated customization capabilities
Open architecture approach to using data
Close partnerships with clients
Part of ISS STOXX and Deutsche Börse Group

With a full suite of indices, STOXX can help you benchmark against the European stock market.

Learn how STOXX’s European indices offer liquid and effective market access.

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