It is now only days from the EU Vote. In a few days, we’ll have the outcome and we can either go back to what we are doing or come to terms with the uncertainty.
If recent surveys are to be believed, Britain could leave the European Union. Lobbying groups are still arguing over what the data means, but the possibility that it could lead to a ‘Brexit’ from the EU must be faced.
There are political and even emotional reasons behind any move to leave the EU, but the biggest impact is likely to be economic. What are the likely impacts on you and your financial plans?
Threats and opportunities
The EU is the largest market for UK exports and these could be damaged by a Brexit under many of the possible exit strategies. The position on services is unclear, and again would depend on the terms of the exit.
Markets will always struggle with this kind of uncertainty and, a potential Brexit will cause some upheaval. However, bullish investors will see that this uncertainty will also present opportunities and look to exploit rather than fear market volatility.
The UK market has enormous exposure to overseas earnings. Should the UK leave the EU, sterling is likely to fall due to the concomitant effects on UK trade and UK domestic politics.
A weaker pound is, however, great news for most UK investors, resulting in currency gains on all overseas investments and competitiveness gains for UK businesses with business overseas. Worst affected investments would be the small and mid-cap equities that have strongly outperformed the large caps, and helped so many UK managers to perform well in recent years.
What is going to happen?
One of the problems in forecasting the impact of Brexit is that there is little consensus on its effect. Credit ratings agencies have said that leaving the EU could mean higher interest rates, higher taxes, and deeper cuts to public services.
Business leaders are split, some seeing the loss of a huge market, and others welcoming the opportunity for trade on a global scale unfettered by red tape. The City is also conflicted. Much of the City’s money markets business is global, rather than regional. London is a hub for trade in securities for firms from all over the world. Leaving the EU could mean reduced regulation on financial services, but it could also mean difficulties in serving the EU.
This uncertainty is compounded by the fact that there is no clear mechanism on how to withdraw from the EU. One option would be EEA membership—the Norway option—which would give Britain trade with the EU almost as it has now, but with no say over EU regulation. Another might be the Swiss model, with goods trade unimpeded. A customs union, or a free trade agreement are also possibilities, as is trade with the EU under World Trade Organisation (WTO) rules. All these arrangements could take years to set up.
Simply having certainly on whether it is an in or an out will probably affect market confidence.
Protecting your wealth
Brexit may still be well down the list of concerns among investors for 2016, but the possibility of leaving Europe may already be affecting economic decisions, and some investors are looking at hedging solutions to minimise the impact.
It is not simply a matter of pulling out of European investment. Assets held in Euros or in the Euro Zone need to be considered carefully, but UK assets and sterling may underperform in light of an extended period of uncertainty. Diversification of both asset class and currency exposure might be necessary to mitigate the risk.
Many investors are looking at their portfolios now, trying to plan how to make the most of them whatever the position will be in a week’s time. Contact us to discuss a review of your position, and to see what steps you should take, whether we’re in, or out.
The value of investments can go down as well as up and you may not get back the amount invested.