As fallout in international financial markets continued on Monday following Britain’s vote last week to exit the European Union, potential negatives in Arkansas are uncertain even as investors shed most U.S. and Arkansas stocks across the board.
David Moenning, chief investment officer for Little Rock-based Sowell Management Services, said international financial markets will likely remain uncertain for months to come as policymakers and investors try to understand how the crisis will play out. Moenning, whose firm offers a broad array of portfolio strategies as well as turn-key back office service solutions to financial advisors such as Ameritrade, Fidelity Investments and BNY Mellon, said he is mostly worried about the soundness of European banks.
“We can talk about the worry of the EU or the possible domino-effect of Frexit, Itileave, Outstria, the Czechout or the Portugone, but what the worry is really about is the banks,” Moenning said. “The big key threat is that the biggest (European banks) have seen their largest two-day drop in history.”
Moenning’s insight was spot on Monday as stocks in Europe’s largest banks fell sharply for the second straight session. In London, shares of Barclays fell by nearly 21%, while the Bank of Scotland, UBS and Deutsche Bank fell by 13%, 7% and 6.2%, respectively.
TIME TO DIVERSIFY
Moenning said the company is counseling financial advisors to have a plan to diversify their clients’ portfolios and look for buying opportunities if the market declines into double-digit territory. Founded in 2001, privately-held Sowell manages more than half a billion dollars in client assets and has offices in Chicago, Denver and Little Rock, and was recently named to the Financial Times’ top 300 registered investment advisers (RIAs).
Because the final decision on EU referendum is likely more than two years away, Moenning said the real issue of concern for the financial markets to watch is to see if the Brexit crisis leads to a possible run on European banks.
“If that happens, we are back to a (banking) crisis and back to a contagion, and that is the real concern that the markets have,” Sowell said.
That concern is also fresh in the minds of international monetary policy makers, including the U.S. Federal Reserve Board. This weekend, the nation’s central bank issued a statement saying it was watching the developments from the Brexit vote and would step in and make any necessary changes if markets went awry.
“The Federal Reserve is carefully monitoring developments in global financial markets, in cooperation with other central banks, following the results of the U.K. referendum on membership in the European Union,” the U.S. central bank said in a statement. “The Federal Reserve is prepared to provide dollar liquidity through its existing swap lines with central banks, as necessary, to address pressures in global funding markets, which could have adverse implications for the U.S. economy.”
UNKNOWNS REMAIN FOR ARKANSAS EXPORTERS
Officials with the Arkansas District Export Council said there have been discussions with some of its member businesses across the state concerning how the United Kingdom’s vote to exit the EU might affect their day-to-day operations.
William Burgess, chairman of the nonprofit export council, said most Arkansas businesses that export to Great Britain or Europe already have set their exchange rate for current contracts as the British pound fell to a 31-year low on Monday.
“There are some who are concerned about pending contracts, but most businesses are dealing with dollars (because they) don’t want any exposure to currency risk,” he said.
Like Moenning, Burgess said there are also some worries about what may happen down the road in export markets, especially since negotiations over the timetable to leave the EU could take several years.
“I guess some are concerned about what is going to happen if (Great Britain) leaves the EU and the uncertainty of doing business there,” he said. “The process is going to take two years and we don’t know how it is going to work out. It is the uncertainty that is giving some pause.”
Burgess, owner of Power Technology Inc., said his company has two distributors in England to market his company’s line of products. The Little Rock company, which makes lasers for a variety of biomedical, scientific and business applications, was recently recognized by U.S. Secretary of Commerce Penny Pritzer for its exporting expansion to 37 countries worldwide.
Burgess said he plans to have discussions this week with his British contacts to get their thoughts about the business environment in the United Kingdom.
“This is not out of a sense of panic or urgency, but we just want to get their thoughts about what is happening on the ground,” he said.
And although the U.S. is the United Kingdom’s top export destination, Arkansas trading alliances with England, Scotland, Wales and Northern Ireland is not as substantial as some of the other 50 states that trade with America’s most prominent ally. According to the International Trade Administration (ITA), part of the U.S. Department of Commerce, Arkansas-made goods exported to foreign markets in 2015 totaled nearly $6 billion. Although the United Kingdom is not listed among the top five markets for export shipments from Arkansas, trade with the important British ally has exceeded $830 million over the past five years, according to state economic development officials.
Data from ITA shows that the Arkansas’ largest export market in 2015 was Canada. Arkansas posted merchandise exports of $1.2 billion to Canada in 2015, representing 20.5% of the state’s total merchandise exports. Canada was followed by Mexico ($837 million), Japan ($532 million), France ($465 million), and Singapore ($251 million).
However, Great Britain was listed as a leading source of foreign investment in Arkansas, behind only France and Japan. In 2013, foreign-controlled companies employed 43,100 Arkansas workers, which represented 4.3% of the state’s total private-industry employment.
AEDC spokesman Scott Hardin provided Talk Business & Politics with a breakout of Arkansas’ trade with the United Kingdom over the past several years. In 2011, Great Britain was the state’s 5th-largest trading partner with $132.7 million in exports. That total amount of business has risen 27.8% to $169.6 million in 2015, but that still makes the Brits the state’s 11th largest trading partner.
ARKANSAS STOCKS CONTINUE TO TUMBLE
Arkansas stocks ended nearly down across the board for the second straight trading session on Monday. El Dorado’s Murphy Oil Corp. saw the biggest drop, sliding 8.36%, or $2.55 at $27.96. Investors also sold-off shares of USA Truck Inc., which closed down 7.2%, or $1.44 at $18.51.
Arkansas banks also continued to lose substantial ground in tandem with their European counterparts. Home Bancshares was the biggest loser among Arkansas’ financial concerns, declining 5.16%, or $1.02 at $18.76. Bank of the Ozarks and Simmons Bank also fell more than 3%.
On the positive side, Tyson Foods Inc. continued to weather the Brexit storm, rising into positive territory for the second straight session as investors looked for shelter in profit-making, blue chip stocks. The Springdale meat and chicken giant posted gains of 1.3%, or 82 cents at $64.39, as more than 5 million shares traded hands. Wal-Mart Stores Inc. fell slightly to $71.31, down 65 cents.
Overall, U.S. stocks extended losses for the second straight day following Britain’s EU vote. The Dow Jones Industrial average fell 261 points, or 1.5% at 17,140 at the close of this week’s first day of trade. On Friday, the Dow lost $2.08 trillion or more than three percent of its wealth, closing down 610 points.
Other major U.S. stock indexes also sustained deep losses on Monday. The broader S&P 500 fell 37 points, or 1.8%, while the tech-laden NASDAQ stock exchange declined 114 points, or 2.4% to 4,594.