Why Brexit could lift the ASX

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The 31 October deadline for Brexit (the exit of Britain from the European Union, for those who have been living under a boulder) is fast approaching, and the pound sterling, UK markets and global markets more generally are getting worried. Boris Johnson, the UK’s new (and highly idiosyncratic) Prime Minister is whipping up worry as he doesn’t seem to be too concerned whether Britain leaves with a deal or no deal. Unlike the game show, a no deal is predicted to be a globally disruptive event, possible leading to supply shortages of essential goods and medicines in the UK.

I have no doubt that a no deal Brexit would be highly disruptive for the motherland. But it could also be a boon for the ASX.

Here’s why.

Back in 1973, the UK joined the Common Market, known today as the European Single Market. It’s a turbocharged version of a free trade agreement that allows liberal movement of goods, services and labour, not subject to currency risk, customs checks or visa requirements.

There was actually outrage in Australia when this occurred. Back in the 1970s, Britain was Australia’s largest trading partner under an old colonial-style arrangement that allowed free trade within the British Empire. Australia exported massive quantities of beef, dairy products and wool to Britain and many people, especially farmers, were irate that Britain would abandon us for the Europeans.

Of course, we have pretty much ‘gotten over it’ as China, Japan and other Asian countries more than filled the gap.

But now Britain will be pulling itself out of the EU (with some bad blood) and looking elsewhere for many imports that were previously cheap and easy.

There are already preliminary discussions of an Australia–UK free trade agreement and if this were to be implemented it could be a boost for many of our biggest exporters. Dairy darlings like Bubs Australia Ltd (ASX: BUB) and the A2 Milk Company Ltd (ASX: A2M) have boomed due to the insatiable demand for high-quality dairy products in China and the rest of Asia. Under a free trade agreement, the UK might very well jump on the bandwagon.

The same goes for Treasury Wine Estates Ltd (ASX: TWE) – now that French and Spanish wine is about to become more expensive, Treasury’s wines might be looking a whole lot more appealing in Britain this time next year.

Foolish takeaway

Whilst I think that Britain will be in for some pain when it finally leaves the EU, this pain could concurrently be Australia’s gain – and an opportunity to resurrect an old trading alliance. We shall have to wait and see what BoJo pulls out of his hat, but I think there’s a silver lining (for us, anyway) in the Brexit cloud.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended BUBS AUST FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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