Britain is mired in chaos by the looming prospect of a “No Deal” Brexit. All of the options at this point are bad. British society is being torn asunder, and Britain’s governing political party is at risk of tearing itself apart. The overall picture, no matter how you slice it, is awful.

But there is a silver lining for Europe here. When the chaos of Brexit is finally resolved, however that happens, investors are likely to breathe a sigh of relief that could boost European equities.

And the headline-grabbing pain of Brexit is a glaring red “CAUTION” sign for pro-separatist movements in Italy and France, which could help the EU hold itself together.

So, what is happening with Brexit, exactly?

We’ll start with a metaphor. Imagine you find yourself a contestant on the game show “Deal or No Deal.” Except this is a nightmare version of the show, with highly dangerous twists and turns.

For instance, if you don’t make a deal before the timer goes off, you don’t just lose your chance at a prize. You get thrown into a pit with snakes and alligators.

But the players on your team can’t agree which deal to make. You have the option of starting over — or quitting the game — but your team can’t agree on that move either.

Your team members shout at each other as waves of anger, fear, and confusion wash over them. To make things worse, half of your team argues the snake-and-alligator pit might not be so bad. The other half considers this view insane.

There are entreaties to the game show host to change the rules. But the host doesn’t budge.

There are cries to start over. But half the team refuses.

The clock ticks down toward zero, and the snake-and-alligator pit awaits.

The metaphor roughly describes what is happening inside British parliament, with the whole country along for the ride, as the United Kingdom threatens to crash out of the European Union in a No-Deal Brexit scenario.

A hard Brexit, or “No Deal” Brexit, is the default option now. If the British government cannot get its act together by March 29, trade ties with the European Union will be cut automatically, with no clear plan for what takes their place.

This could mean lines of idled trucks at UK points of entry that back up for miles. It could mean countrywide shortages of food and medicine, as shipments from Europe get blocked by customs or cease delivery in the first place. It could mean shops and stores closing for lack of supplies, and food rationing in severe instances.

(Stockpiling efforts have already begun, under advisement of the UK government, in case something like this happens.)

And a No-Deal Brexit could mean hundreds of plants and factories get shuttered, with various international businesses leaving the UK permanently (as British-made goods would be stranded without trade access to the European market).

The international business community is terrified by the prospect of a No-Deal Brexit. Those who see Brexit as an emotional issue, with an emphasis on the vague notion of sovereignty, overlook the fact that profit-and-jobs impacts could be catastrophic.

To give just two examples: Airbus, an airplane manufacturer with 25 plants in Britain, has said it could lose up to a billion euros a week in the aftermath of a No-Deal Brexit. Ford, the U.S. auto company, has estimated a No-Deal Brexit would cost the company $800 million in 2019 alone. And there are countless more such examples.

Various CEOs and industry association heads with assets and employees in Britain have stated, loudly and repeatedly, some version of: “You don’t understand. This would be epically bad — for us and for the country, too.” Those who make goods in the UK for export to Europe have added: “We’ll stop all new investments. We’ll move our factories and won’t come back.”

It took more than two years of incompetence to take Britain to the edge of a No-Deal Brexit cliff.

In the summer of 2016, Britain voted in a countrywide referendum — the largest one ever — on whether to leave or remain in the European Union.

The “leave” side won by a slim margin, even in the face of credible warnings this would be a very bad move for Britain, in no small part because of deceptive campaigning (and the fact that many didn’t understand what they were voting for).

The simplest explanation for why Brexit never made sense is that Britain is a hub, the European Union is a network, and Brexit is a hub leaving a network, a move virtually guaranteed to make the hub worse off — especially after four-plus decades of integration with Europe and London’s status (destroyed by Brexit) as a financial center for all of Europe.

After the UK voted to leave in 2016, it was left to Theresa May, the incoming Prime Minister, to hammer out the divorce terms with Europe, and to figure out what the Brexit deal was going to look like.

This process was always going to be a mess, but May and her team made it a far worse mess. They hemmed and hawed and made impossible demands with no leverage, leaving EU negotiators scratching their heads.

Finally, after 18 months, May hammered out a deal. But her own party hated it. The pro-Brexiters decided that, because of the concessions she made, May’s Brexit deal with Europe was worse than no deal at all.

As a result of that, after five days of debate, the May Brexit deal was voted down by British Parliament. The Prime Minister faced historic humiliation at the hand of her own party, by a stunning margin of 432 “no” votes to 202.

As of this writing, nobody knows what will happen next. Brexit is still on, but without clear terms, and with the UK government in a total state of dysfunction.

To fulfill Brexit peacefully, the UK needs to agree on the Brexit terms of divorce.

If it fails to do this, on March 29, the UK will simply crash out in the “No Deal” scenario that has half of the UK and most of the international business community (the part of it with ties to Britain, anyway) terrified.

A growing chorus of alarmed observers, including influential voices like The Economist magazine and Martin Wolf of the Financial Times, argue that the UK needs a new referendum.

With a new referendum, the UK populace would be asked some version of: “Are you sure you still want Brexit?”

Given what they’ve learned over the past two years, and the slim margin of the leave vote in the first place, the answer to a new Brexit referendum might be “No, we changed our mind,” in which case the UK would stay in the EU.

But the pro-Brexiters aren’t just fiercely opposed to Theresa May’s deal. They are also fiercely opposed to a new referendum, saying that it would be a travesty of democracy to overturn the results of the first vote.

So, the pro-Brexiters have decided that door No. 1, May’s hated deal with Europe, is out. They have decided that door No. 2, a new referendum, is also out (though they might get overridden on this).

Meanwhile there is hope that Europe might cut the UK some slack, but EU negotiators aren’t budging.

That leaves door No. 3 — the metaphorical snake-and-alligator pit of a No-Deal Brexit, which could happen automatically if nothing is decided or implemented by March 29.

The silver lining for Europe in this mess takes three forms:

  • The chaos and uncertainty of Brexit is largely “priced in” to markets and is acting as a weight on European equity prices. If that uncertainty is resolved, European equities could surge higher in a sigh of relief.
  • The European Union is facing threats from pro-separatist movements in multiple countries (like Italy and France). The pain and turmoil of Brexit could warn the Italians and the French to stay off a similar path.
  • If Britain winds up staying in the European Union — if Brexit is effectively not just delayed but cancelled, an unlikely but real possibility — that would be hugely bullish for Europe and the UK alike, as the whole Brexit exercise was primarily emotion-driven and not economically rational in the first place.

Below is a list of 20 European stocks, all of which could benefit heavily from a change in sentiment when the Brexit question is resolved (assuming “No Deal” is avoided, which it likely will be — if only because it’s so bad).

List of 20 European stocks that could benefit from positive Brexit resolution

We don’t know how Brexit will resolve itself. The whole thing has been so chaotic, with emotions so high on all sides, that a wide range of things could happen.

There could be new headlines regarding the prospects for referendum, or parliamentary efforts to rule out the No-Deal Brexit option, by the time you read this.

Barring that, the UK government could keep playing chicken with the possibility of crashing out of Europe until the end-of-March deadline gets closer. Or Theresa May could be forced out.

There are too many possibilities to determine the specific ending. One way or another, though, a lot of negative Brexit sentiment has already been priced into European stocks, and a resolution could free them up to them trend higher.

Richard Smith
Richard Smith, Ph.D.
CEO and Founder of TradeSmith