UK voting on their membership of the European Union – what a Brexit could mean

Britons vote on Thursday on whether to quit the 28-nation European Union, amid warnings from world leaders, investors and companies that a decision to leave would diminish British political and economic influence. There is concern this will create turmoil on investment markets and send shock waves around the world.

After a heated public debate, polls remain tight (see chart), with a significant part of the electorate still undecided. The outcome could swing in either direction on polling day with the turnout of younger voters potentially proving decisive.

Brexit graph

 

What are the risks if the vote is to ‘leave’? Are there still consequences for Britain (and Europe overall) if the ‘remain’ wins?

A ‘leave’ vote is expected to cause a significant upheavals in world markets and the UK pound. The internal British concern is more to do with the currency and what action the Bank of England needs to take to ensure stability.

 

How long market upheaval lasts is problematical. We saw in recent times the Greek crisis dominate markets and then everyone moved on and things returned to normal. Yes, Britain is much bigger than Greece but the issue is more political than economic. For example, if within days of the decision, economic data out of the US or China specifically relevant to those nations showed a real positive to those economies, markets would react more to that than Britain’s exit. In the modern world, Britain is no longer as powerful an economic centre as it once was with it only representing 5% of the global economy.

 

The concern is the impact a ‘leave’ win will have on all of Europe. Not just economically, but politically.

 

Will other countries feel the same way? In recent local and state elections in many European countries, far right wing parties promoting a nationalist agenda have gained increased support and in some cases, won power. The leader of the Dutch Party for Freedom who are performing strongly, said that “a British exit vote would create a patriotic spring that would end the EU”.

 

Without Britain, the EU would be smaller. “This would see its influence in global affairs diminished and would be even more dominated by the Germans and, to a lesser degree, the French, than it already is. There are also fears of the contagion effect of a Brexit on the rest of Europe. The UK isn’t the only nation where there are separatist movements”. (The Australian – 22/6/16)

 

Political uncertainty is likely to stay elevated in Britain over the summer, unless an overwhelming majority votes against leaving the EU. The debate over whether Britain should leave the EU has intensified the division between the two major political parties which is, in turn, causing instability within the government. There is concern that if the Leave vote wins by a small margin, “there is a risk of a constitutional crisis, as it is not clear how Parliament would vote given that crucial details are missing on the future trade regime with the EU.  This issue of EU trade has been inextricably linked to the issue of free movement of people by the Leave campaign.” (Fidelity Perspectives, June 2016)

 

As with all market gyrations, it’s about the unknown, which creates fear. In the press, we see opinions by experts making gloomy predictions should Brexit. Many of these predictions will be wrong. Somewhere in there, someone or maybe more than one, will have made a correct call. But today, we don’t know what will be correct.

 

Overall there is still sluggish world growth. Interest rates are at all time lows for that reason. Share markets are volatile for the same reason and, as was pointed out earlier in this article, positive news out of the two biggest economies, the US and China sees a jump and bad news, the opposite.

 

Britain’s decision either way won’t change that. But there will no doubt be challenges in the short term over their decision. However, markets are resilient and whenever there is a down turn for whatever reason, skilled opportunistic investors often turn that negative into a positive result down the track.

 

Rothgard relies on a range of professional investment managers to take long term views on our clients’ investments. We expect them to definitely take into consideration short term events such as a Brexit, but more importantly to keep their eye on the long term performance of the portfolio.

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