Should we stay or should we go is fiendishly difficult because the question is multifaceted and each facet is itself devilishly difficult to get a handle on.
A key facet and a source of much debate is whether the UK economy would benefit from Brexit.
What would the effect of Brexit be on immigration, trade, manufacturing, financial services, regulation, innovation, productivity, foreign investment, the public sector, consumption and the property market?
It’s no surprise that there is a great deal of disagreement on all of these but overall (and as long as you ignore external factors), the likelihood is that Brexit would be neither as good nor as bad as is advocated by its proponents and critics.
Capital Economics, commissioned by Woodford Investment Management, made exactly this point recently even going so far as to state that in among all the uncertainty it was more plausible the net effects of Brexit would be modestly positive to the UK economy.
However, the UK economy does not operate in isolation and so focusing exclusively on it does not answer the question of whether Brexit would be good for the UK or not. There are wider socio-political ramifications.
Consider pro-EU Scotland. The UK economy might possibly be better off under Brexit, should it remain together, but what about if Brexit triggers another Scottish referendum? By all accounts negotiating an exit from the EU will take at least two years. How does the UK negotiate strong trade terms and a graceful exit from the EU when it may actually begin fracturing right in the middle of those negotiations?
The prospect of another Scottish referendum would be destabilising enough, but what happens if it is actually successful? In the end the UK didn’t have to answer this question in 2014 – but it may in future.
Consider also the effect of Brexit on the EU itself. One thing probably every British person would agree on (although probably not every Continental) is that the EU would be weaker without the UK. But is it in the UK’s interest to have a weaker EU when 40% of Britain’s trade goes to other EU countries?
A successful Brexit vote may strengthen the hand of other secessionist parties throughout Europe. That could impact growth in the EU, and so growth in the UK through second order effects.
Leaving aside the economy for a moment, from a security point of view it’s tough to see how a weaker EU would benefit Britain. In everything from terrorism threats to potential aggression from nationalistic Russia, the EU provides collective security benefits. A simple thought experiment to confirm this is whether Vladimir Putin would vote for Brexit if he could (given the sanctions the EU has applied to Russia).
And the above are just a few of the “known-unknowns” that UK voters have to ponder as they assess Brexit. Pity also the UK portfolio managers out there who have to tackle a slightly different question in order to position their portfolios appropriately: not whether the UK is better off in the EU, but whether UK voters will think they are better off in the EU.
Betfair currently has the chance of Brexit as 31% (29 Feb 2016) and the polls are undecided (YouGov at 37% each for remain and leave with 25% undecided) but you can be sure this will evolve and quite likely in an unpredictable way.
Add to that the fact it’s not always obvious which investment will perform best in the case of an in or out vote and the uncertainty inherent in building client portfolios is multiplied.
Fortunately, in the midst of all the debate and unpredictability surrounding the Brexit issue, the question of how to invest during a period of uncertainty is easily answered and never really changes: pragmatic diversification across asset classes, regions, sectors and styles.
It’s important to try to get to grips with narrow points like the direction of sterling, UK vs EU interest rates and which UK sectors are best positioned for possible Brexit, but we should never lose sight of the fact the world is an uncertain place and position for the unexpected by not having all our eggs in one basket.
Nic Spicer is portfolio manager for PortfolioMetrix
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