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Spring Investment Monitor – March 2016Brexit vote may spur EU unrest
While the question over who will be the next US president appears to have boiled down to Democratic candidate Hillary Clinton and Republican Donald Trump, the effect on US equity markets has been minimal and will only perhaps be felt later this year.
Far more pressing for the UK market is the referendum on June 23 over whether to remain in or leave the EU. The prospect that Britain will vote to part ways with Europe, dubbed ‘Brexit’, has already affected sterling, which is down about 6 per cent against the dollar over the past year.
With the vote still several months away, the effect on the UK economy and currency looks likely to be dragged out, particularly if a majority votes to leave.
Mike Bell, global market strategist at JPMorgan Asset Management, warns: “Certainly we think volatility is likely to remain elevated in the run-up to the referendum. If we left the EU, you would see potentially quite a bit more downside to sterling from where we are now.
“On our measures, sterling looks to be somewhere between 5 and 7 per cent below where we would expect it to be were it not for these concerns around Brexit, but you could see further moves down caused by the uncertainty. And certainly, if we left, you could see sterling fall another similar amount again, so another 5-7 per cent from where we are now.”
| Brexit – What next if leave wins? |
Stephanie Flanders, chief market strategist for Europe at JPMorgan Asset Management, says: “Politicians on both sides are fond of pointing out that nothing would change the day after the vote, and that is true; every law and regulation that was in place the day before the vote would remain in place until the terms of Britain’s exit from the EU were agreed, a process that is expected to take at least two years. “But we can be fairly confident in the short run that UK equity prices would not stay the same, and nor would the value of the pound. UK equities could see a further 2-3 per cent sell-off, in addition to perhaps a further 10 per cent fall in the trade-weighted value of sterling. If the polls begin to point to a clear ‘No’ majority, much of this would have occurred before the vote itself. “Research by my colleagues at JPMorgan Chase estimates that a negative result could take about one percentage point from the growth rate in the 12 months after the vote – a significant hit, given the baseline growth forecast of about 2 per cent in 2016.” |
He believes the outcome of the vote will be that the UK remains in the EU but suggests if Britain were to exit, the economic effect would be prolonged rather than immediate.
Mr Bell adds: “We think it’s clear the uncertainty in the year or two after a vote to leave would be a drag on UK GDP because it would mean lower investment and it would mean greater economic uncertainty, which could potentially hit the UK economy by about 1 per cent per year.”
Even if the UK does stay, the effect could be felt more widely in Europe because it will spur other countries to go to the polls to settle whether they too want to stay in the union.
Steven Bell, BMO Global Asset Management’s chief economist, recalls: “It’s very interesting, actually. We had a conference with our colleagues from the Netherlands and we said, what do you think about all this? And they said they thought Brexit was a bigger issue for Europe than the UK.”
He goes on: “I’ve heard many people say they are deeply worried about the future for Europe should we choose to leave. Yes, I think it would be a dramatic change and there is talk about other countries holding referendums on leaving, Finland or Denmark perhaps.”
Until recently, asset managers had been wary of coming out in favour of either camp, but one of the most high-profile investment houses, BlackRock, has publicly set out its argument for staying in the EU.
Philipp Hildebrand, vice chairman at BlackRock, states: “While it is neither our practice nor our role to wade into political debates, we felt it was incumbent on us to help our clients think through the issues.
“Our bottom line is that a Brexit offers a lot of risk with little obvious reward. We see an EU exit leading to lower UK growth and investment, and potentially higher unemployment and inflation. Any offsetting benefits look more amorphous and less certain, in our view.”
Certainly it seems there is a lot at stake for the UK and the future of Europe both in the lead up to and in the aftermath of the referendum.
Ellie Duncan is deputy features editor at Investment Adviser
