On Thursday, voters in the U.K. will decide whether their country should leave the European Union. The decision may seem remote to Americans, but its impact could be anything but.
The Brexit referendum -- the mashup of "Britain" and "exit" -- is approaching as polls indicate that the British public is split on the decision, although support has been picking for splitting from the EU. It's a decision that the Brookings Institution says will decide the future of the pan-European political and economic partnership.
Americans are notoriously focused on domestic issues, so the impending vote in the U.K. may seem distant to U.S. consumers in more ways than one. Yet if the Brits decide to leave the EU, the move could ripple across the Atlantic, disrupting everything from trade to equity markets. Already, the potential for a Brexit was cited last week by the Federal Reserve Chair Janet Yellen as a reason for leaving U.S. interest rates untouched.
Brexit raises "the risk of uncertainty," said Greg Daco, the head of U.S. macroeconomics at New York-based Oxford Economics. "Businesses don't like to not know what is happening. The more uncertainty, the less likely they are to invest."
Simply put, fear and anxiety aren't healthy for markets. A successful Brexit could potentially embolden voters in other European countries who aren't thrilled with the EU and want to exit, raising the risk of more defections. Even though seven out of 10 Europeans say the U.K.'s exit would be a bad thing, they're actually split on whether they view the EU favorably, according to a Pew Research Center poll earlier this year.
It's clear that the impact would be most keenly felt by Brits and their European counterparts, of course. Britain's participation in the EU has helped expand its economic prosperity, and its departure would "be akin to a tax on GDP," according to the Organization for Economic Cooperation and Development. By 2020, the U.K.'s GDP would likely be 3 percent smaller, or the per-household equivalent of about $3,200.
So how could Brexit affect American investors? Below are three ways that they might feel the impact if British voters give the "yea" on Thursday.
Roiling the markets. U.S. investors are already nervous about the vote, as well as those in other countries. Because investors are seeking safe sovereign debt, that's pushing the 10-year U.S. Treasury to record lows, Brookings noted. If the Brexit referendum passes, it's likely U.S. equities would react negatively, sending shares down, says Daco, although he believes that the decline would likely be short-lived.
American corporate earnings. Aside from the short-term market impact, Brexit could put a dent in American corporate earnings over the longer term. Companies in the S&P 500 get an aggregate of 2.9 percent of revenue from the U.K., No. 3 following the U.S. and China, according to an analysis from Factset.
The sectors most at risk are energy, information technology and materials, which get the most revenue from the U.K. On top of that, 30 companies in the S&P 500 get more than than 10 percent of their revenues from the U.K., including Newmont Mining's (NEM) 64 percent and Molson Coors Brewing's (TAP) 34 percent.
Large U.S. banks could also be hurt, due to higher costs and weaker capital markets activity, Keefe, Bruyette & Woods said in a report. Earnings could be hit by as much as 6 percent this year.
The future direction of interest rates. If Brexit passes, it's likely to weigh on the Federal Reserve's decision-making about raising interest rates, as it did in its most recent meeting. The Fed's next rate-setting meeting comes in July, which means Brexit could push the possibility of the next rate hike to September, Daco said.
While low interest rates are good for the economy because they make it cheaper to borrow money, they also signify that underlying issues are hampering the economy. If U.S. growth were stronger, in other words, Brexit would be a "nonissue" for the Fed's decision on interest rates, Daco said.
All in all, a British decision to abandon the EU would likely have negative consequences for Americans, according to Aaron Klein, a fellow of economic studies at Brookings, and his colleague DJ Nordquist.
"Our economy does not need additional global headwinds," they wrote in a research note. "Global weakness and financial market uncertainty is not the recipe for stronger economic growth."