Wisconsin exporters could see ‘Brexit’ fallout for years to come

Investors also likely to feel effects

In the wake of the UK’s vote to leave the European Union, known by most as Brexit, local manufacturers with exposure to the UK market are watching the fallout closely.

Zaiser
Zaiser

Among them is Waukesha-based Hydro-Thermal Corp., which makes steam heating products and systems often used in food processing. Hydro-Thermal does a lot of business in the UK, and could be impacted by four key factors, said Jim Zaiser, president and chief executive officer.

SR-Econ-Trends-072516-HydroThermal
One of Hydro-Thermal’s steam heating systems.

The company may have to change the manufacturing code on its products from the European to the British code. Another possibility is that foreign companies doing business in the UK, such as Hydro-Thermal customer Heinz, may not make investments in their UK plants. Or, multinational firms may limit their business operations in the UK. Zaiser also worries UK-based company leaders could lose their pull and influence.

Any one of these scenarios playing out could cost Hydro-Thermal 10 percent of its business, Zaiser said. The company has about 100 employees in the U.S. It is represented by five contractors in the UK.

“It’s so early in the process, you don’t know exactly what’s going to happen,” he said. “It depends on how companies and governments respond to different scenarios.”

Area economists also are parsing out how Brexit will impact Wisconsin companies and investors long-term.

UK exporters like Hydro-Thermal are likely to continue struggling with a strengthened dollar and its impact on earnings, said Sara Walker, senior vice president and senior portfolio manager at Associated Private Client & Institutional Services in Milwaukee.

Walker
Walker

“Even small companies, more and more, are exporting,” she said. “If this uncertain environment contributes to renewed strengthening in the dollar or, and this is a big one, a stoppage of the dollar’s fall…that keeps our exports expensive.”

“There won’t be any direct effect on Wisconsin because our trade with Britain or Europe is a small part of Wisconsin’s total trade,” said Dr. Abdur Chowdhury, professor of economics at Marquette University. “But, what is going to happen, the indirect effect, because of the Brexit uncertainty you see the dollar is gaining in value. If the dollar stays strong that affects Wisconsin’s exports. A strong dollar will make our exports less competitive globally.”

“Companies that do business in the UK or who export to the UK, they might be more impacted because I think there’s an expectation that economic growth in the UK, specifically, will slow down,” said Brian Andrew, chief investment officer at Racine-based Johnson Bank.

It will be a several years before the full impact of Brexit is known, since the UK will have to renegotiate how goods and services move from the country to other parts of Europe, Andrew said.

On the investor side, sentiment has improved from the initial strong reaction, Walker said.

“I think it is indicative of general health in the capital markets and in the investment environment,” she said. “This is certainly nothing to dismiss, but it doesn’t seem to be carrying over into a financial-type crisis.”

But that doesn’t mean the undercurrent of uncertainty that has plagued investors over the past eight years has gone away. Brexit only served to add to unease, and could influence Wisconsin business executives’ decisions on whether to invest in equipment, people and acquisitions.

“At the margin, incrementally, it’s a negative for the world economy,” said Joel Huffman, senior portfolio manager at U.S. Bank in Milwaukee. “(But) this is not a Lehman event, as people were coining it.”

Klein
Klein

With or without Brexit, investors are in an anemic growth environment, said Kathy Klein, senior consultant and vice president at Park Place Capital Management Inc. in Milwaukee.

“We do think that investors are going to have to get comfortable being uncomfortable. Not only market returns in the U.S., but across all asset classes and really all regions, are going to be lower,” Klein said.

Mistakes to avoid, she said, are being too short in bond duration and pulling out of international markets in reaction to the Brexit fallout. It’s important to think long-term.

“The key is just to keep focused on what it is you want to do with your investments and stay disciplined and stay diversified and these things tend to work their way out in the markets,” Huffman said.

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Molly Dill, former BizTimes Milwaukee managing editor.

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