If Britain leaves the European Union, its departure could create years of economic uncertainty for global aerospace and defense firms, with effects not unlike the U.S. sequester. Experts sayBrexit could cause nations to scale back arms buys, reduce collaboration, and prompt firms to reassess their strategic goals.
“Essentially, it makes you press the restart button on your entire European strategy, whether it’s investment strategy or program captures or [corporate] partnerships,” said Avascent’s Joe Walsh, who runs the consulting firm’s London office. “The sky is not going to fall, but everyone’s going to have to stop and rethink.”
The latest polls show Britons evenly split ahead of the referendum vote on Thursday, but the uncertainty is already having an impact. Big European defense firms have seen their stocks slide in recent weeks, even as U.S. giants are up. Over the first two weeks of June, Italy’s Leonardo (MIL:LDO, Financial) (né Finmeccanica) was down 15 percent, Sweden’s Saab down 6 percent, and France’s Thales down 8 percent, Callen notes. U.K firms BAE Systems (LSE:BA., Financial) and Cobham (LSE:COB, Financial) are down 2 percent and QinetiQ is down 6 percent. The stocks have rebounded somewhat in recent days ahead of the vote. At the same time, Lockheed Martin, Northrop Grumman, and Raytheon are up 2 to 5 percent.
“We believe that some of this can be explained by concerns over the UK June 23 vote and more generally concerns about global economic growth,” Byron Callan, an analyst with Capital Alpha Partners, wrote in a recent note to investors.
If the British vote to leave, the results could reprise those of sequestration, in which Congress capped the military’s 2013 budget, forcing the Pentagon to slow its purchases of warplanes, ships, armored vehicles, and other equipment. American defense leaders have called budget uncertainty — not Russia, China orISIS — the “biggest challenge” facing the military. Experts struck a similar chord when talking about Brexit.
“Really, the common theme…if it were to happen, would be uncertainty and uncertainty is always bad for business,” Walsh said.
Thursday’s vote could change defense firms’ merger-and-acquisition plans, he said.
“If you are somebody that’s looking to either divest or buy a business with significant U.K. exposure, you’re probably not going to sign the contract on June 20,” Walsh said. “If Brexit happens, then you’re really going to take a very hard look at whether that investment still makes sense on June 24.”
Brexit “would mean substantial upheaval for global markets, financial firms, and businesses that would likely leave London,” Brookings’ Aaron Klein and DJ Nordquist wrote last week.
Large American companies, including Lockheed Martin (LMT, Financial), Boeing (BA, Financial), Northrop Grumman (NOC, Financial), Raytheon (RTN, Financial) and General Dynamics (GD, Financial), all operate U.K.-based businesses. In many cases, those offices also handle business across continental Europe.
