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Brixit: What a British Exit From the EU Looks Like


With Brixit, England would become the most attractive European place for financial engineering, whether for banks, investments, or large corporations. But will it happen?

Then, the European future could change, massively: (1) either other countries would follow the English example and leave as well, thereby creating a much smaller, but probably, finally, federalizing Union (made of Germany, France, Benelux, Italy, maybe Spain), ie. a "German-engineered" EU; (2) or (a less likely scenario, but worth considering), the EU would implode and disintegrate, resulting in a vast area of free trade and probably free movement of tourists, but a systemic financial shock and massive devaluations of currencies; (3) or, another five to 10 years of status quo, where a British-less EU would sputter along until solutions (1) or (2) eventually pan out.

Regardless, with Brixit, England would have free reign to use the pound sterling, the CBE, and loose financial laws to virtually become the most attractive European place for financial engineering, whether for banks, investments, or large corporations. England would legally become a mix of Switzerland, Luxemburg, and Lichtenstein – probably even more so, should the EU protest against it: England would exacerbate the financial competitiveness out of spite!

All of these hypothesis being laid out, the key question concerns the realistic nature of Brixit. Will it happen, despite what current polls say? Would the Brits vote themselves out of the EU? Also, would the rest of Europe be more than happy to kick the Brits out?

"If Brits want to go, let them go!" would be a common slogan outside of England, so in reality, could it be a win-win situation? Well, here comes my contrarian explanation (as always): I actually believe that Cameron is playing a massive game of bluff; his promise to organize a referendum is just a way for him to plan enough to renegotiate the UK status in the EU. His end game is to keep England in the EU, to avoid Brixit at all costs, to keep all the benefits, to keep a lot of British elites happy (few of them want out… populism might make Brixit an easy theme, but that is the double-edged sword of populism). Ideally, Cameron would like to double-dip, to become the renewed financial haven of Europe and the Occidental economies and to stay in the EU.

This is the giant Game Theory at play right now: On one hand, the drive and need for a uniformed EU (based on stronger democracy, some sort of unified elections, as well as a unified tax and financial code), on the other hand, the survival of havens, of special pockets, of protected interests.

With all of these challenges on deck, Europe is going to maintain center stage for a while longer. Grexit might still happen, $Pain might be painful, Francestein is an ugly risk, Cyprus is broken, Scoxit and Brixit are on the table, and the Italians are also hanging around… after Berlusconi, Grillo! And if you are not familiar with Slovenia just yet, you might get the surge soon.

Europe is going through the awkward teen years, and Brixit is yet another potential challenge on the horizon.

Investing-wise, for the time being, I maintain an overweight bullishness on England and London's financial economy. Just as I like Indonesia as a play on booming expansion, I see the UK financials coming out as winners from any outcome. Full Brixit would turn London into Singapore. Negotiated EU terms would mean Cameron "won" and the UK financial world would have been granted special terms.

Trading-wise, I have been in and out of iShares MSCI United Kingdom Index (NYSEARCA:EWU) and so far, I have taken long positions at every retest of the trend. The "trade" has worked well for a while as EWU keeps on bouncing on the blue trend line. I have a pending order to re-enter on the long side at 18.26; my stop would be $0.25 below (if it gets filled). As well, I have a long-time holding into GBPUSD, long GBP, at a 1.55 cost basis, 1.48 risk and targeting, without time frame, 1.70 and above.

It's too early and uncertain to actively invest based on Brixit, but the concept itself should remain front and center of your European agenda. Please feel free to share your thoughts in the comments below. Thanks for reading.

This article by Alex Salomon was originally published on See It Market.
Alex Salomon has positions in EWU and GBP.
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