Here's a Rich Contrarian Profit Play on the United Kingdom's Brexit Problems

The United Kingdom has a new prime minister - Boris Johnson.

He's undoubtedly a controversial figure at a time when the UK is teetering on the edge of outright upheaval over its "Brexit" departure from the European Union.

Now, the UK is 3,600 miles across the Atlantic from Washington, D.C. Plenty of Americans would be hard-pressed to pick Boris Johnson out of a crowd; they might be even more hard-pressed to care about what's happening in Britain.

That would be a mistake - an expensive one.

The UK is the world's fifth- or sixth-largest economy, depending on how you want to measure it. It's a critically important NATO and European ally. The cultural ties are important, sure, though for investors, they're not quite as important as the business and financial links, or the $262.3 billion worth of trade our two countries conduct in any given year.

Just because it's cliché to say "When one sneezes, the other gets a cold," doesn't mean it's not true.

So let me walk you through the big changes underway across the pond right now - and the even bigger changes that could rock markets in short order.

And to make sure you're in the best possible position, I'll name a steeply discounted stock that puts cold, hard cash in your pocket...

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The New PM Could Face an Impossible Task

Boris Johnson - the public face of the "Brexit" referendum on leaving the European Union - won several rounds of voting among Conservative Party Members of Parliament (MPs) and rank-and-file party members around the UK to succeed Theresa May as prime minister.

U.S. President Donald Trump praised the decision and cheered the fact that certain people are calling Johnson "Britain's Trump."

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The British tourists enjoying the Hungry Bear bar with me here in Lake Tahoe didn't seem too pleased.

And it's certainly true Johnson has neither a broad popular mandate nor a parliamentary majority since the Conservatives entered a "confidence and supply" arrangement with Northern Ireland's Democratic Unionist Party.

British parliamentary power politics have become markedly more chaotic since 2016. But chaos always breeds opportunity - and the chaos will likely only increase.

As prime minister, Johnson will look to finish what he started by steering the British government toward a showdown with the EU. Johnson says his government will get a Brexit deal completed by Oct. 31. He will aim to succeed once where Theresa May failed several times.

Europe says they've already negotiated a deal with Theresa May, and it's up to the British Parliament to pass it. Johnson has said that if Europe refuses to (re)negotiate, he'll take the UK out of the bloc post-haste.

"Do or die" he said of the current deadline.

But opposition MPs have said they won't allow a Brexit that doesn't include a formal divorce deal with the EU.

This deal would have to address controversial line items on the hard land border between the UK constituent nation of Northern Ireland and the independent Republic of Ireland. The opposition wants to see guarantees on the future of London's status as a leading European financial center, and they're worried about the possible loss of EU consumers and the introduction of tariffs.

In a much broader sense, Johnson may have a fight on his hands to keep the United Kingdom united.

The Brexit vote was hardly a landslide; less than 52% of voters voted "Leave" throughout the UK.

And when you break the UK down into its four constituent countries - England, Wales, Scotland, and Northern Ireland - the margins get even thinner.

Broken down, 53.38% of English voters and 52.53% of Welsh voters ticked "Leave" on their 2016 ballots, while 55.78% of Northern Irish voters and a full 62% of Scottish voters opted to "Remain."

In nine of the UK's 13 largest urban areas, a majority voted to stay in the EU. Talk of Irish reunification and Scottish independence are now fully in the mainstream of debate in Northern Ireland and Scotland. It's not inconceivable that voters in those countries might at some point in the not-too-distant future opt to leave the United Kingdom altogether to maintain an EU membership a majority see as beneficial.

A hard Brexit would have profound consequences on the British economy. The nation's government concluded that it would cost British businesses about $82 billion a year, while its GDP would slump by 5.4% to 9.5% over 15 years.

And because of lost trade, they might end up owing the EU roughly $20 billion for unpaid bills that have been hanging around. There are also another 70,000 British jobs at stake.

A soft Brexit would likely have a softer impact... but it's very unclear just how soft it would be, or whether it would negate what benefit there is to Brexit in the first place, like potentially lucrative trade deals.

The country already saw the pound sterling plunge after the 2016 referendum, and it lost its "sterling" credit status. A soft Brexit might allow Britain to remain in the EU for a little while longer, but with the deadline approaching quickly, the odds of Britain falling out of the EU without a deal are rising.

The smart move, however, is the contrarian one - to leave the UK... and seize on the incredible bargains right in its backyard, just across the Irish Sea in the Republic of Ireland.

Here's the Market with the Most to Gain

It's no secret that Europe is a mess - its banking system is in disarray, it's drowning in debt, interest rates on trillions in assets are negative.

But, as is often the case in investing, the cleanest dirty shirt in the laundry is the one you want - a place where capital and talent will flow, and economic activity is thriving.

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Brexit has already caused business across the UK to flee or at least pare down operations. Most of the financial jobs are shifting to Germany and Switzerland. But lost in the headlines about Brexit has been the steady flow of investment income and jobs to neighboring Ireland.

IDA Ireland reported in March that 70 companies shifted investments to Ireland as a result of Brexit and spurred the creation of 5,000 jobs. That was a boost to the already 230,000 Irish residents who work for foreign companies that have increased investment in the country thanks to its favorable business climate, lower taxes, and immigration regime.

The Irish Times notes that Barclays Plc. (NYSE: BCS), Morgan Stanley (NYSE: MS), TD Securities, Wasdell Group, S&P Global Inc. (NYSE: SPGI), Thomson Reuters Corp. (NYSE: TRI), and Coinbase have all increased investment in the country.

Despite Europe's ongoing problems, Ireland looks prepared to avoid a recession - even if a hard Brexit hits in the coming months. Ernst & Young just hiked its 2019 GDP outlook to 4.1% after a strong first quarter for the country. Ireland, with just 3.1 million working-age people, added 81,200 new jobs during the first quarter and saw tax revenue spike more than anticipated.

Ernst & Young projects that more direct investment will trickle into Ireland as companies looking to avoid exposure to Brexit but remain close to the UK shift their operations.

Political uncertainty will still produce some volatility at times, as Ireland still faces exposure to global trade battles, disruption in the auto sector, and the "hard border" problem with Northern Ireland. But Ireland - for now - looks like it is increasingly insulated from the threat of a European or even global economic slowdown.

Here's the Irish Exposure Every U.S. Investor Needs

I'm talking about The New Ireland Fund Inc. (NYSE: IRL), a closed-end fund centered on investment in Ireland-based companies. Shares are down from $12.05 in May 2018 to $8.82 on Tuesday. Naturally, broader concerns about Brexit and the European economy have weighed on the fund.

Closed-end funds, like the ones I've recommended in the past, are a great way to go and are often available at steep, baked-in discounts. They're like mutual funds that trade on the open market.

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The difference is that they trade at the whims of investors. They can trade at a discount to their net asset value (NAV); they can trade at a premium to their NAV.

It's pure behavioral finance. And I like to get in on certain funds that trade at a steep discount and have significant upside to close that spread between the market price and the underlying price.

With the IRL fund, we've reached a point where the price is too attractive to pass up.

IRL shares are trading at a ridiculous 17% discount to its net asset value with a 3.23% yield. And this is at a time that Ireland's economy looks like a real long-term winner.

This means that you're paying $0.83 on the dollar for a portfolio of many of Ireland's top-performing companies. The fund includes assets like industrial giant CRH Plc. (NYSE: CRH), Kerry Group Plc. (OTCMKTS: KRYAF), RyanAir Holdings Plc. (NASDAQ: RYAAY), Bank of Ireland Group ADR (OTCMKTS: BKRIY), and Kingspan Group Plc. (OTCMKTS: KGSPF).

This closed-end fund offers investors a contrarian, low-risk way to play Brexit, collect a stable dividend, and gain the upside of both share appreciation and the closing of the gap between the share price and the net asset value of the underlying stocks. It's the no-brainer the world doesn't see right now.

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About the Author

Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.

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