British voters face an important but difficult decision in June, made all the more challenging by the lack of clarity about exactly what the United Kingdom’s relationship with Europe would look like.
The forthcoming June 2016 Brexit referendum vote—where the United Kingdom will choose to remain or leave the European Union (EU)—has centered investors’ attention on the consequences of this decision. Europe and the United Kingdom hold strong economic ties, as bilateral trade is significant, but there are several other crucial issues to understand both sides of the debate. Importantly, an exit from the EU is unprecedented and as a result has generated uncertainty in the relevant markets.
Laura Somers-Edgar, Client Portfolio Manager on Lazard’s UK and European Equity teams, discusses the key considerations and implications around Brexit.
In brief:
- The referendum on Brexit is a binary question, but the outcome is not. If the United Kingdom leaves the EU, there is a range of possibilities which depend on the terms of the new relationship.
- Key areas to consider for a better understanding of both sides of the argument include: trade, foreign investment, and EU contributions (in addition to the more sensitive issues of immigration and sovereignty).
- An exit from the EU is likely to have repercussions in economic growth, currency markets, and equity markets in general.
- For equities, the ramifications of Brexit span the criteria around earnings source (with sterling fluctuations playing a key role), large versus small cap, and stock- and sector-specific considerations.
- The financial services sector is a major contributor to the UK economy in terms of trade surplus and employment, and could be significantly influenced by regulatory changes and loss of access to the European Single Market.
- As fundamental investors we remain focused on companies that can thrive in varying economic environments.