On June 23 UK voters will vote in a referendum on the country’s membership of the European Union. Dubbed as ‘Brexit’ the pros and cons of the move have been argued passionately by both sides. While those living in the British Isles will feel the immediate effects of the referendum result what do UK investors living abroad need to take into consideration? Remember, British expats are eligible to vote too.
The consequences of leaving the EU
A vote to leave the EU would have a few immediate consequences. Since a rerun of negotiations has been ruled out, the first move would be for Britain to trigger the exit clause introduced in the 2007 Treaty of Lisbon, initiating a two-year ‘departure lounge’ negotiation over its post-exit deal before ‘take-off’ (or, for Europhiles, ‘descent’). The EU would lose a significant member, especially in terms of economic, military and diplomatic clout. It would also lose its leading financial hub. As for the UK, there is a risk that a second Scottish independence referendum would see Scotland choose Brussels over London.
The economic impact is more difficult to predict. In a report commissioned by Neil Woodford, Capital Economics argued that the economic difference between the two outcomes would in fact be relatively marginal, but that an exit was slightly more likely to be economically positive than negative. A Barclays report argued that a British exit would be far more negative for the EU than for the UK, and could even precipitate capital flight to the UK, which would be perceived as a safe haven amid the increased uncertainty in the EU.
What the experts think
A Bertelsmann business poll asked more than 700 company executives in UK and Germany-based companies how they would respond to a British exit: 29% said they would reduce capacities in the UK or relocate, and 79% were opposed to a British exit. An Ipsos Mori poll of 600 economists conducted in late May found that 88% believed an exit would damage the UK’s growth prospects. Nevertheless, a British Chambers of Commerce survey conducted in mid-May showed a first-quarter increase in the number of UK businesses favouring an exit. Yet for both sides, it is widely agreed that trade deals and success in deregulation will determine the actual growth impact of an exit.
The financial sector has also weighed in on the implications of an exit. Blackrock warned of the impact on UK stocks and property; JP Morgan’s outgoing CEO warned of “massive dislocation” in the City as companies lost their EU passport; HSBC said it would shift 1,000 jobs to continental Europe. Paul Richards, head of regulatory policy at the Capital Markets Association, warned that financial regulation would increase; uncertainty would rise; foreign investment would slip; some City jobs would be lost; and trade deals would take years to negotiate.
The precise economic and financial outcomes of a British exit from the European Union are impossible to chart – the club has only ever grown. Much would depend on the success of the UK’s ensuing trade negotiations with the EU and other partners.
These imponderables mean that uncertainty is likely to dominate in the remaining weeks leading up to the referendum. Markets may not like bad news, but they dislike uncertainty at least as much. In February, sterling fell to a seven-year low.
Volatility is thus likely to remain high in UK-focused stocks ahead of the referendum; in the case of a vote to leave, it is likely to persist for some while, but the uncertainty this reflects does at least have an end date if there is a vote to remain. It is therefore important for investors not to allow this volatility to lead them to make hasty decisions, either before or after the referendum.
Diversify your portfolio
As ever, a well-diversified portfolio, with significant exposure to different geographies and asset classes, is the best long-term strategy to help protect investors against uncertainty.
The exit door has now been unlocked. Rather than trying to identify an exit strategy, investors should remain focused on companies’ long-term growth outlook and on whether that outlook is reflected in their valuations. Successful companies, and successful investors, will factor political risks into their decisions without being governed by them. If they do, then the EU referendum should claim more victims in politics than among those investing prudently for their future.
This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any strategy. Where the views of third parties are given, these are not necessarily shared St. James’s Place Wealth Management.
It’s always recommended you seek advice when it comes to financial planning. Should you wish to discuss any of the above information please do not hesitate to contact St. James’s Place at firstname.lastname@example.org.
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