Global Strategy Outlook

BREXIT - are investors too relaxed?

BREXIT - are investors too relaxed?

A recent survey by MSCI suggested that institutional investors were relatively relaxed about the upcoming referendum, despite the likely market consequences of a BREXIT vote. The probability assigned to BREXIT, for instance by reference to spread betting, has tended to move within a range of 20-35%, and is currently at the bottom end of that range.

But are investors too relaxed about the outcome? The last British general election produced a result which totally defied the polls. This time around, telephone polls show a clear lead for the IN camp, while online polls show a smaller advantage for the OUTS. The country is split demographically, with the old and the poor far more likely to want out. Could it be that, on June 24th, those in favour of BREXIT, particularly the older generation, simply feel more motivated to make their way to the polling station?

Furthermore, as the countdown to the referendum approaches, there is likely to be an increasing focus on the political implications of an OUT vote. At present, Labour voters and Scottish voters are both firmly in the "remain" camp, by a 2:1 majority. But many of these may switch if they see an opportunity to get rid of David Cameron, or to trigger a new Scottish referendum.

There is no doubt that a BREXIT vote would be damaging for UK equities, for UK corporate bonds and for sterling. The paper below from Pictet posits an 8% fall for UK equities in the event of an unexpected vote for BREXIT. It would be no surprise to see increased market volatility - in both directions - in the coming weeks.

At Savvy Investor we've curated some of the best commentary on the likelihood of BREXIT and its impact - the impact on markets, on the City of London, on UK pension funds and on legal frameworks. Here are some of the best white papers and recent blog posts:

Brexit's Implications for Financial Markets and Beyond (Lazard)
In this paper, the authors explore both sides of the “Brexit” debate and examine the political and economic implications for the United Kingdom and the European Union as a whole.

Brexit: The implications of the UK voting to leave the EU (Schroders)
Ahead of the UK's referendum vote on its EU membership, investors worldwide are weighing up the opportunities and risks should voters decide to leave bloc. This report by Schroders examines the Brexit risk and the possible impact on the UK economy both in the short and long term. The authors also consider the likely reaction by markets for sterling, bond and equities.

Brexit: What would it cost the world economy? (Pictet, May 2016)
The risk of "Brexit" is one of the top 'known unknowns' of 2016. Pictet Economist Jean-Pierre Durante uses two global models (of the kind used by central banks) to examine the possible implications of a "Brexit" for the world economy.

Brexit Barometer - probabilities and "polls of polls of polls"
What is the probability of BREXIT? Daily update of the "polls-of-polls" and probabilities, recording three "polls of polls" and three measures of implied probability.

Leaving the EU: Implications for the UK financial services sector (PwC)
This 48-page paper by PwC analyses the potential impact on the UK financial services sector of a "Brexit" from the EU. The authors provide two alternative "Brexit" scenarios - the FTA scenario and the WTO scenario.

Brexit: Effects on UK Pension Schemes (Punter Southall, Apr 2016)
This Briefing Note by Punter Southall examines the implications for UK Pensions of a British exit from the EU.

Brexit: Legal Consequences, Counterparty Risk and Derivatives (Allen & Overy)
This article by Allen & Overy highlights some of the ways in which a British exit from the European Union may impact the UK's derivatives markets. The authors examine the possible regulatory, legal and documentation implications. It is crucial to remember however that the negotiated terms of a Brexit will be central to the ultimate legal analysis and the precise impact on market participants. This article therefore should not be regarded as a complete list of all potential issues and their impact.

The Economic Consequences of Brexit: A Taxing Decision (OECD, 2016)
This 35-page paper by the OECD details the economic consequences of the UK leaving the EU. According to the authors, the so-called "Brexit" will have a major negative shock on the UK economy, imposing rising and persistent costs that will otherwise be avoided if the UK remained in the EU. The paper examines short- versus long-term effects on the economy concluded that Brexit brings many uncertainties which make it difficult to quantify the real economic effects. However, the outcomes across time and model specifications are consistenty negative.

Life after BREXIT: What are the UK's options outside the EU? (LSE, 2016)
In this paper, Thomas Sampson and Swati Dhingra of the London School of Economics and Political Science examine what may lie ahead for the UK should voters decide to vote against EU membership on June 23rd, 2016.

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