The referendum on the UK’s future in the EU is suddenly upon us and the British public vote on whether or not they want to stay in the EU next week.
Unsurprisingly, this has seen significant media attention as both sides make claims and counter claims about the benefits of a vote in either direction. It has to be said that the majority of these are politically driven rather than supported by hard facts, with the truth more likely to be somewhere in the middle. As a result, we would expect the impact on the UK economy to be less dramatic than that described in the media, with boosts being seen in some sectors being counterbalanced by negative effects seen in others, regardless of the outcome. Ultimately though, we just don’t know what the long term impacts would be of leaving the EU and this uncertainty will likely cause further volatility in risk assets, in the UK and Europe, in the lead up to the referendum.
There are a number of key topics that people mention when discussing the impact of a ‘Brexit’, and as you would expect, each of them have potential impacts that are both positive and negative.
Perhaps the most talked about in the media is what a Brexit would mean for the UK government in terms of having greater control over Britain’s borders. It is arguable that Britain could see an increase in skilled workers entering the country through tighter migration controls; however, whether the UK gains any powers to restrict the flow of unskilled workers from Europe will depend on its future relationship with the European Union and whether it wants to retain access to the single market. Conversely, a reduction in unskilled migration could also cause potential problems for low-wage sectors of the economy that are heavily dependent on migrant labour, such as agriculture.
A Brexit would give Britain an opportunity to broker its own trade agreements with the rest of the world, something it has not been able to do as part of the EU. Although potentially beneficial, we should also remember that a significant amount of our exports are linked to European Union membership. Thus, a renegotiation of a trade agreement, outside of the single market, would be needed if the UK is to avoid paying trade tariffs. Were a Brexit to occur, it is fair to say that it would be a negative for the EU; Britain has a world-class financial centre that no other major European city is likely to match in the short-term, is a major contributor to the EU budget (10% of the total in 2015) and is a leading voice for free markets. It is, therefore, unlikely that the EU will ‘play ball’ during negotiations over new trade agreements with the UK in an attempt to discourage other separatist calls that are likely to arise, particularly from the troubled peripheral countries.
These are just two of the many questions facing voters as they try to decide whether the UK would be better in or out of the EU. The property market, foreign investment, the City of London, changes to regulatory and legal landscapes and the state of the country’s finances will all be impacted by the outcome of the referendum. Again, the perceived impacts on these areas will be dependent upon the arguments you listen to and the way politicians try to influence voters. The thing to remember is that neither side is coming from a position of certainty, with their predicted outcomes being best estimates.
The value of Sterling
If the country does vote yes to leaving the EU then the biggest impact will be that there is likely to be pressure placed upon the value of sterling. This will benefit those large companies that operate globally and have earnings in currencies other than Sterling, but is likely to make life tougher for those companies focused on the domestic market. This means it is more important than ever to have a well-diversified portfolio, both in terms of sectors within the UK and regions globally. Although client portfolios do have exposure to UK equities this is balanced against a range of overseas equity funds and our asset classes such as fixed income. Exposure to overseas equities is going to be vital in navigating the coming months; the focus of investment portfolios being balanced with exposure in regions outside of the UK will help to limit the impact of any volatility seen in the UK markets.
We must stress, however, that whilst we do feel that this is largely a political issue and that the prospects for the UK economy are good, whether in or out of the EU, there will ultimately be some economic impacts, but purporting to quantify these with any accuracy would be misleading.
Please remember any views or facts expressed above are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness. Any expressions of opinion are subject to change without notice. None of the information should be regarded as advice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments and the income from them may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested. Any tax treatment is dependent upon individual client circumstances and may be subject to change.
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