OK, the headline is a slight exaggeration. World War II is over, and the U.S. and the U.K. won. We all know that.
But now, it looks like Britain is voluntarily surrendering all the power it has in Europe in favor of Germany, while the U.S., despite the "special relationship" that the U.K. claims to have with Washington, DC, can do nothing but watch in horror as events unfold. This could have serious consequences for U.S. investors.
The threat of a "Brexit", as the potential exit of Britain from the European Union is known, now looms large, with the latest polls showing the U.K. population equally split whereas before a majority was in favor of staying in the EU.
U.K. Prime Minister David Cameron is in Brussels for talks about renegotiating some of the conditions for staying in the EU, but as he is asking for permission to discriminate against other EU citizens in labor markets, his demands are likely to be rejected.
A quick parenthesis. If you think American investors will not be too affected by this tedious European saga, take a look at the chart below:
Source: U.K.'s Office for National Statistics
More than 50% of the stocks quoted on the London Stock Exchange in terms of value belong to foreign investors; around 46% of that is owned by investors from North America, who have amassed stocks worth around 424.4 billion pounds ($636.6 billion). Europeans come a far second, holding just 26% of the value of the stocks listed on the London Stock Exchange.
So, U.S. investors must prepare for the very real threat of a Brexit, and the first step to do that is trying to understand who the winners and losers might be.
The main winner will be Germany (hence the headline). For a long time, Frankfurt has wanted some of London's power as a financial hub.
U.S. investors seeking exposure to Europe have traditionally done so via the London Stock Exchange, where lots of European companies are listed, rather than going through Frankfurt or Paris or Amsterdam stock exchanges. Equally, U.S. investment banks have established London as their main European headquarters.
Goldman Sachs (GS) is the most prominent U.S. investment bank to have warned against a Brexit so far. It said earlier this year that if Britain chooses to leave, it won't close its London operations completely but it would certainly shift more resources into Frankfurt, where the European Central Bank (ECB) is based.
JPMorgan (JPM) did not say anything officially, but there have been reports in the U.K. press that it was in talks to relocate part of its U.K. business to Luxembourg, and that so was Europe's biggest bank, HSBC (HSBC).
It's not just that regulations would begin to diverge between London and the EU if the U.K. leaves. In the spring, London won a landmark ruling in the European Court of Justice to allow big euro-denominated transactions to still be cleared in London, despite a decision by the ECB that they should only go through clearing houses based in countries that are in the eurozone.
The British argument was that the ECB rule, dating back to 2011 and disputed by London since then, went against the EU's principles of free movement of goods, people, services and capital. However, if the U.K. leaves the EU, that argument is no longer valid and the euro-denominated transactions would have to move out of London into an EU hub, most probably Frankfurt.
The losers are likely to be U.K. stocks and, more generally, London as a financial center. As a Brexit referendum approaches, investors should keep that in mind.
