George Lucas
A Brexit vote this Thursday in favour of leaving the EU is most likely to have a negative impact on markets believes a leading fund manager.
However, it might not be all gloom and doom says George Lucas, managing director, Instreet Investment.
“There are several factors that might limit the downside. Firstly, the current nervousness may in part be a reflection of the fact that nobody yet knows the result of the referendum. Plus, predictions are mixed with opinion polls giving the lead to the ‘Leave’ camp but bookmakers’ odds pointing to a victory for ‘Remain’.
“Some of the uncertainty should ease once the outcome is known.
“Secondly If the vote is in favour of leaving it will still take some time for the changes to take place. In fact, the UK would probably remain a member of the EU for several more years. In the meantime, UK politicians (most of whom are in favour of remaining in the EU) could drag out the process or try to find a solution that replicates EU membership in all but name.
“This also means there would be time to clear up some of the uncertainties about the wider impact of Brexit, notably the arrangements which would govern UK trade with the remainder of the EU and the rest of the world.
“Thirdly, once analysed, there will be little effect on trade. Europe is Britain’s biggest trade partner but, as a percentage of trade, this has reduced dramatically since the global financial crisis as Europe has stagnated whilst China, the US and emerging markets have grown.
“And finally, fear messages coming from politicians will ease. At the moment, those who are in favour of staying in the EU have an incentive to talk up the risks of an exit. Once the votes have been cast, we expect they’ll change their tone to one of reassurance for businesses and investors.
“What actually worries people is the possibility that one of the bigger risks of a UK exit is the fact it might empower EU-skeptics elsewhere in Europe and lead to a broader breakup of the EU. Governments in countries like The Netherlands and Sweden, for example, may find themselves under pressure to hold their own referendums on the issue.
“This risk of contagion is likely to cause issues for markets for a while if the UK does vote to leave. We hope, however, that other countries would wait to see what deal the UK negotiates with the EU on exit terms before holding their own votes.
“Investors should not ignore that equity markets have been trading somewhat trendless for a while because of Brexit. The nervousness can be seen most clearly in the strong performance of safe haven assets such as the Japanese Yen and Gold.
“If Brits vote to remain, the strength of safe haven assets should unwind whilst equity markets and the Sterling should rally.
If the vote is to leave, markets will take it negatively and the Sterling will likely weaken significantly driven by fears about the British economy. It may also cause further delay with a US Fed hike and induce additional monetary easing elsewhere including from the European Central Bank and Bank of Japan.
However, as mentioned, these concerns are probably overdone and any sell-offs should calm down once rational analysis of Brexit effects is carried out, “ said Mr Lucas.
