Brexit: Trillions In Wealth Destroyed?

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Summary

Global markets took a beating after news broke that the U.K. voted in favor of leaving the eurozone.

This flies in the face of earlier polls that had indicated the opposite would occur, and which had previously pushed markets higher.

Now, after such a significant failure in forecasting, markets are falling hard, destroying more than $1 trillion in the U.S. alone.

There could be some overreaction here, but if U.K. politicians follow through, investors will be slammed hard.

Despite polling data suggesting the contrary, the United Kingdom's referendum, held on June 23rd, resulted in a major (though narrow) win for Brexit camps. While millions of U.K. citizens are doubtlessly rejoicing (at least the 15.6 million of whom have voted in favor of the Brexit, and whose votes had been tallied as of the time of this writing), the rest of the world remains horrified by the results and the likely impacts it will have on the global economy. In what follows, I will dig into some of the data and give my own thoughts on the matter and what I believe it means for investors moving forward.

Who voted?

As of the time of this writing, an estimated 32.3 million votes have been accounted for, making up all but a few handfuls of areas within the U.K. About 51.7% of these have so far voted in favor of leaving the European Union, while the remaining 15.6 million citizens have voted to stay. According to The Guardian, the breakdown of who voted and what they voted for was interesting, to say the least.

In the image above, you can see that, on average, citizens with higher income levels voted in favor of staying within the EU. From a purely objective standpoint, this makes sense and aligns with the argument made by both sides of the fray that many of the economic benefits associated with staying in the EU would accrue to these individuals more than they might for lower-income workers. A natural extension of this relates to education. In the image below, you can see that, on average, those with a higher level of education were more likely to vote in favor of staying within the EU.

The last demographic data I thought was interesting relates to the average age of voters. In the image below, you can see that younger voters tended to favor remaining in the EU, with the youngest having a very strong preference, while those in favor of leaving the group tended to be older.

What this means for the U.K.

Now that we have a good understanding of the demographics associated with the Brexit vote, let us try and assess the damage. Before doing so, I must first state that this is all based on information I have at my disposal, and the volatility that we'll be facing as a result of this vote over the next few weeks or months will mean that the numbers are subject to change. In fact, to have a full understanding of what the final impact of the Brexit will be on the global economy, we'll likely need to wait for years and see several studies, but many economists have said the impact will be a big negative.

This is especially true for the U.K., which risks going into a recession next year and could see its GDP drop by as much as 5.5% by 2019, according to the IMF. In addition to being hit there, the U.K. will see its purchasing power on the international scene erode considerably. At this moment, the pound sterling is trading for $1.3301, a decrease of 11.4% from the year-to-date high of $1.5018 seen just prior to the voting results being released. This will help make the country's export-oriented businesses more competitive on the global market, but will harm imports. This may seem like a fair trade-off to some, but the fact that the nation imports about $191 billion more every year than it exports will cause it some harm. On top of this, the euro is also down about 4.6% on the news, reeling from the realization that its second-largest economy is likely to be leaving.

$1 trillion+ destroyed

As I mentioned above, it's impossible to know the full scale of this impact until we're at least a few years out, but it is possible to understand the basic scope of it in the eyes of the markets. Looking at S&P 500 (NYSEARCA:SPY) futures contracts, markets in the U.S. are expected to fall by about 5.07% in the morning. Should this not rebound in the weeks or months to come, the impact will be on a scale so large that it will wipe out $1.11 trillion in market value here alone. To put this in perspective, this represents about $17,051 for every citizen in the U.K. and $66,467 for every citizen in the U.K. who voted in favor of Brexit.

That is just the impact in the U.S. for now. When you look globally, the results are horrific. As of the time of this writing, the Nikkei (OTC:NTKIF) index is down around 8%. Stocks in Shanghai have fallen 1.2% (honestly, with all the volatility seen from there lately, I was expecting far worse), and the Hang Seng Index (OTCPK:HSXUF) managed to drop 4.7%. Markets in Europe are not open yet, but futures prices indicate declines of between 6.6% and 7.5% across major nations like France, Germany, and the U.K. in light of the news.

The oil market is also being beaten up right now, with the United States Oil ETF (NYSEARCA:USO) and others set to fall in excess of 6% if they follow oil prices appropriately. On a dollar-per-barrel basis, we're looking at price declines of around $3 right now. Should this also not recover, the hit, at third-quarter global demand estimates, would suggest revenue drops of $288.69 million per day, while fourth-quarter demand estimates would impact global oil revenue by $290.10 million per day. Throughout the rest of this year, this would total about $52.96 billion in lost sales.

Takeaway

Under no realistic scenario that I could find does Brexit make any economic sense. The impact that is sweeping across the world is significant in nature and poses a risk to global markets, but I do believe there's a good chance the markets may be overreacting to some extent here (they often do). Of course, based on the legislation of the referendum, the votes are non-binding, so politicians may decide to override the voters in this case (though that would likely be political suicide) - but if they don't, then investors should be very cautious moving forward.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.