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Three Bullish Forces Boost Brexit Outcome

Britain joined the European Economic Community (the EU’s predecessor) in 1973 largely because of the chance at free trade with Europe’s large market.

Since Britain’s traditional commonwealth markets were drifting away — largely because of post-World War II policy errors — the fast-growing, high-income EU appeared to be an attractive alternative.

What the British people didn’t realize, though, was that the EU’s founders were serious in their wish to centralize control and create a European unitary state. Apart from the loss of freedom, centralizers were mostly socialists — ones who weren’t fully committed to a market economy.

Hence, as the central EU state grew, it became more and more restrictive, with a gigantic regulatory apparatus that stifled the entire enterprise.

In fact, the EU bureaucracy was so highly protectionist that even a free-trade agreement with economically unthreatening Canada took a decade to negotiate, and almost fell apart at the last minute.

The entire EU fiasco could’ve easily been avoided by undoing the 1992 Maastricht Treaty, abolishing the European Parliament — a legislative body that tends to aggrandize itself and overregulate — and returning the EU to a free-trade zone.

Britain advocated such a policy shift for 40 years but found no takers.

So in the end, a modest majority of British voters decided that leaving was the best option.

An Overreaching Media

The media propagated Britain’s “Remain” campaign.

Pundits believed that Europe’s “single market” was so important to Britain that it should move to position itself like Norway.

Norway is a member of the single market but not of the EU itself.

But the media’s plan was fatally flawed in two ways…

First, Norway cannot control immigration from the EU— a major issue with British voters because the EU’s own immigration control is so porous.

Second, Norway cannot enter into separate trade agreements. That is, since it’s subject to the protectionist EU.

Britain’s prime minister, Theresa May, decided — rightly, in my view — that a “Norway” position would be unpopular with Brexit voters. She also declared it less economically attractive than full withdrawal from the single market.

The fear is that May’s decision will negatively impact Britain’s $65 billion automotive industry.

Much of Britain’s automobile industry is designed to sell across the entire EU, and they could be damaged either by an EU tariff or, worse still, by incompatible product standards.

But I don’t see this being a detriment to the British economy, however.

There are no British-owned volume auto manufacturers. So although the jobs prospects are grim for workers in factories owned by Toyota, Nissan and India’s Tata Motors, there are few British companies affected.

The Shotgun Approach to Investing

Here’s why I’m bullish on Britain…

Bullish force #1: In the financial sector, the withdrawal of “passport” privileges — by which London-based banks can do business across the EU — appeared, at first sight, to be worrying.

However, most banks doing business in continental Europe already have some operations there — so much of the change can be accommodated by simply “booking” transactions differently.

For example, Barclays Germany would become a subsidiary of Barclays Ireland rather than directly of the parent. Thus, the job and business losses in finance seem likely to be moderate.

Bullish Force #2: Britain now has a chance for a better trade deal with the incoming Trump administration in the United States.

Bullish Force #3: The pound has already fallen 20% from its pre-Brexit level, which is very good news for British exporters. Growth has accelerated, and there seems every chance it will continue at a faster rate.

But instead of taking a rifle approach — that is, trying to select the best individual British stocks to own — I recommend a shotgun approach.

Since we want exposure to exporters, which tend to be larger companies, I suggest the broadest ETF for your British investment, the iShares MSCI United Kingdom ETF (EWU).

The $2 billion fund presently sits at attractive levels considering the three bullish tail winds I covered above. Add a trailing 12-month yield of 3.9%, and it’s worthy of a spot in your portfolio.

Smart Investing,

Martin Hutchinson
Senior Analyst, Wall Street Daily

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