Wednesday's vote to avoid a no-deal Brexit further confirms my feeling that the situation will not end as bleakly as many fear. This is obviously a risky opinion to have publicly.
I believe the main aim of opposition to Prime Minister Theresa May's attempts at crafting a withdrawal agreement with the European Union has been mainly to avoid leaving the EU altogether. This has been an incredibly divisive issue within Great Britain.
The original vote to leave the EU was won by the slimmest of margins, with 51.9% of the vote. It's extremely likely that a second referendum could overturn the original decision. I think that's what the opposition is really aiming for. They don't want to cause chaos. They want to win -- despite the fact that they lost the first time.
With Lloyds Banking Group (LYG) in my portfolio, I've been watching the drama in Britain intently. I bought the stock back around December, on what I viewed as a bottom over the Brexit drama, as well as the improvement of the general market downslide. I'm long on the stock, so the short-term drama doesn't mean much to me. Still, I've been paying attention.
In January it was announced that Lloyd's had secured a Berlin banking license so it could create a subsidiary within Germany as a hedge against uncertain Brexit ramifications. This is part of a broader plan to create subsidiaries within the EU in order to keep operations rolling. I am not worried about this situation wreaking havoc upon banks that have planned accordingly. The uptrend in the stock performance showcases that I'm not alone in my viewpoint. Some costs may be incurred in the short term, but I do not believe this will affect long-term business.
The bank has scaled back the total size of its business a bit in regards to total interest income, but the returns on their revenue have been much better. The bank has done a good job of returning to earnings growth in the last year, and the balance sheet looks much cleaner than in the past. For those capable of taking the heat, I think the stock's big pullback created a buying opportunity.
Being an American, I can see some merits to both sides of the argument. The negative side of being a member of the EU is that you're affected by the trials and tribulations of other states operating with the community. When Greece had its financial woes, pressure was put on the other member states to bail them out. Now Italy is suffering a recession with its own sovereign debt problems.
On the flip side, the U.K. is trying to exit what is essentially a free trade union. There will be a lot of headaches in attempting to maintain the same amount of trade freedom if they leave. This is especially tricky for an island nation that has historically relied on imports/exports. It's a tough issue, and one that I wouldn't want to solve.
At the end of the day, I do think that Parliament will solve it. The next step is a vote Thursday to delay the Brexit. If that gets approved (and pending approval by the EU), we're looking at a situation where the possibility of a second referendum drastically increases. In fact, for the first time, lawmakers will also get a chance to vote on that second referendum prospect later Thursday in London. That could create time for a new Prime Minister, and a new negotiation.
The only bad path I see for stocks like Lloyd's would be if Britain leaves without any sort of agreement set up. The actions Wednesday imply to me that the opposition is attempting to force a revote to stop a Brexit altogether, rather than simply block any attempts at reaching a withdrawal agreement altogether, thereby causing a hard Brexit.
If the vote passes Thursday to extend the deadline, I have a feeling that LYG could continue the rally it's experienced thus far in 2019. The momentum seems to be shifting more and more toward Parliament having time to push for a second referendum. In that case, things will go back to the way they were. Whether that is the best move as a whole is entirely up for debate. British stocks will be quite happy, as they love stability above all things.
On the other hand, perhaps operating more independently from the EU would free up Great Britain to negotiate deals the way it wants. Perhaps it would also give them the ability to broker better trade deals with individual nations in Europe. The possibilities and potentialities of both results could be debated for a long time.
What I do know is that British banks are already working to make sure they have offices and capital in different European financial centers. The efforts won't be cheap. But I don't think it'll affect long-term business.
I am not worried about Brexit. If anything, I believe it created the opportunity for me to acquire LYG at a low valuation, with a 5% dividend yield.
I'll be touching on this more down the road, as I very well may be taking another position within U.K. stocks if I see things progressing the way I want.