Britain leaving the European Union — known as a Brexit — will not only hit UK equities hard, it will drag German and French stocks down with it, says Goldman Sachs.
According to Sharon Bell and her team at Goldman, “all of the major European indices are highly negatively correlated to UK risks,” but a Brexit will hit German and French firms would be hit the worse.
In fact, it would be just as bad as a China slowdown due to the similar exposure German and French firms have in terms of sales.
Here are the two killer charts that demonstrate this.
The first shows how German and French companies are more likely to be hit than its European counterparts:
The second chart shows simply how similarly exposed German and French companies are, in terms of sales:
The Goldman Sachs note says:
… the DAX and CAC are very negatively correlated to UK policy risks. The direct sales exposures to the UK are shown in Exhibit 10 for the DAX and CAC 40 companies in aggregate.
For the DAX, the exposure is not immaterial, it is notable that DAX exposure to the UK is very similar to its exposure to China, and of course if sterling falls, this would mean German and French companies would be less competitive with their UK counterparts as well as potentially suffering in terms of weaker UK domestic demand for their UK-based sales.
The latest referendum polls show that either the “Leave” vote is in the lead or the gap between the “Remain” and the Leave vote is extremely slim. Already, this is having a huge impact on the pound.
On Monday, the pound crashed to a 3-week low against the dollar after two opinion polls pointed to a widening lead for the Leave vote. Overnight, the pound has been incredibly volatile, with a spike, then a drop: