As Brexit whips the UK and Europe into a storm of uncertainty, small business owners in the U.S. are only seeing the dark clouds on the horizon, rightfully questioning how the historic move will affect their operations.
On a macro level, it’s easy to make a few predictions about how the UK’s departure from the European Union will affect investment markets and exchange rates in the short term. On a micro level, much remains to be seen about Brexit’s impact on small or online business, but a few implications are immediately clear.
First, it’s important to examine some of the broader effects of Brexit that economists are already calling.
Investment in a Time of Uncertainty
The deer-in-headlights effect that traders tend to experience when market conditions are in flux is well under way. After a wave of sell-offs on June 24, the Dow and S&P both fell more than 2 percent and the Nasdaq took a 2.4 percent-dive before leveling off this week and stemming losses somewhat. In London, the FTSE 100 index fell 2.6 percent and the DAX in Germany declined more than 3 percent immediately following the Brexit vote, according to the Washington Post.
Immediately after the vote, global markets were down $3 trillion, and the S&P lost about $970 billion over just two days.
As of June 30, the S&P has regained half of its losses, while the Dow remains flat for the quarter and the Nasdaq is down 1.9 percent total this quarter, according to CNBC.
In this type of climate, businesses are less likely to make investments, which translates to lower earnings. This is particularly true for UK-based companies and US companies with operations in the UK, of which the U.S. has about $558 billion in investments.
One of the only positive results of the Brexit that’s evident at this point is the strengthening dollar, which some even speculate has become overvalued by 10-20 percent. This makes importing more profitable for U.S. business owners, though at the same time it quells American exports as they become more expensive. If you own an e-commerce or FBA business now could be an ideal time to look further afield for suppliers – the UK could be a great option and pricing will be more competitive than a few weeks prior.
International E-Commerce Companies May See Flux in Customers
As mentioned, the dollar is getting stronger while the British pound is at a 30-year low. As such, American companies with a large portion of customers in the UK may see a significant drop in discretionary purchases due to inflated prices. On the other hand, if you’re a U.S. business owner and you purchase goods from the UK, the cost of your supply is likely to go down.
E-commerce owners would do well to look at the geography of their traffic and determine what portion of it comes from the UK. This will help provide a worse-case-scenario estimate of what your losses might be if you lose your British customers, and allow you to prepare for or prevent any lost revenue.
Another thing to consider in an international e-commerce or affiliate business is a sustainable FX strategy. If you’re based in the US and earning in GBP (whether with a FBA, e-commerce or Amazon affiliate website), your earnings will translate to less in USD. It could be sensible to increase payment thresholds (so you’re not automatically converting the currency) or working with a FX broker to create an optimal strategy. A business earning $1M a year with 10 percent of its business in the UK (earning in GBP) is effectively now making $15,000 less a year (15 percent of $100K) due to the FX changes. Knowing the right time to trade or holding back on getting paid could be a sound investment for savvy online business owners willing to be patient and strategic.
Additionally, British people who own online businesses in U.S. dollars may now be making more money in their local currency, and could also expect to see a higher return if they choose to sell the business.
For example, prior to Brexit, a business valued at $500K would have been worth roughly £345K, with an exchange rate of 1 to 0.69. With current exchange rates hovering around 1 to 0.75, that same business would now be worth £375K.
Investment in Alternative Asset Classes May Rise
As we saw in the recent recession, uncertainty in traditional assets drove many to seek alternatives, such as online businesses. As the asset class has continued to see formalized metrics, valuations and processes, the industry is more investor friendly than ever and we may a growing rate of interest from offline buyers. This is especially relevant to U.S.-based investors who will benefit from a strong dollar. Businesses earning primarily in GBP have become cheaper to U.S. buyers in the last week. While the dollar is likely to stay strong for a while, moving early is always advantageous in times of uncertainty and will maximize the potential returns.
While stocks (such as S&P 500 index funds) can, and generally, should, form a part of a diversified investment portfolio, the returns available from online businesses make it an attractive area for investors looking for less-cyclical returns. Balanced stock portfolios will generally perform well over a 20+ year timeline, while online businesses often grow year on year, regardless of economic conditions.
Post-Brexit Uncertainty Causes Massive Confidence Drop
We reached out to our friends at Halo Financial who assist with our FX strategy and trades between currencies, essential for a multi-national company. We asked for their thoughts on Brexit and what it will do to the Pound and other currencies. Here’s what they had to say:
“The vote to leave the EU is still not sinking in with some voters. Even members of the EU are so shocked that a country would want to leave that their response has been a mixture of anger and derision. Nonetheless, Leave was the decision and the repercussions will rumble on for a long time to come.
A drop in the value of the Pound was inevitable; investors hate uncertainty. Although if anyone can find certainty anywhere in the financial markets right now, I would live to see it. That uncertainty over the UK and its plans for the future outside the EU will not even begin to be resolved until a new Prime Minister is found and Article 50 is instigated, commencing the EU exit negotiations.
Logically, the two-year negotiation period ought to end on 1st January 2019, to tie in with the EU’s financial year. That gives us 30 months of almost guaranteed uncertainty and the Pound will reflect that. Whether Bank of England interest rates or market intervention will be necessary is unknowable at this stage but one factor that appears to have been forgotten is that the UK’s exit is very bad news indeed for the EU.
The Euro, which has been surprisingly stable in comparison with the Pound, is likely to weaken as well in the months ahead. A number of EU nations are pressing for their own referenda and some of the euro-sceptic parties who tend to be to the right of the political spectrum, will undoubtedly seize this opportunity and could do rather well in forthcoming elections. Those elections include Germany where Angela Merkel is under pressure after her ‘open door’ speech to migrants. It has angered many Germans who may be seeking revenge. If a different kind of Grexit (one involving Germany) were mooted, who knows what may happen to the Euro. I suspect it wouldn’t be good.”
For more of their thoughts or to discuss your FX requirements reach out to Richard Smith (Sales Manager) on +44 (0)207 350 5470. FE International are not compensated for mentioning Halo Financial and highly recommend them if you work in multiple currencies.
We’re far from being able to see the full effects that Brexit will have on the global economy, but American small business owners should stay aware of how the move will affect them in an effort to prepare for any losses or change in trade agreements.
What are your predictions on how Brexit will affect online business owners? Have you seen any signs of change in the past week?