On June 23rd, Brits will vote in a referendum on whether to remain in the European Union (EU), or leave. Depending on which news story you read, leaving the EU could devastate the UK’s economy or free it from the shackles of EU regulation.
So which is it? The only answer is: it’s neither. That’s because any argument you hear is either purely academic—meaning, it’s making assumptions to draw theoretical conclusions—or it’s political. Or, it’s some fuzzy combination of the two, like the Bank of England Governor Mark Carney’s assessment that a Brexit would assuredly mean a UK recession (he was hired by Prime Minister David Cameron, who is in the “Remain” camp).
My conclusion? The decision to “Remain” or “Leave” will not impact my forecast for modestly positive returns from equity markets in 2016, and I do not think it will dramatically affect the growth trajectory for the U.S. and the world.
In the near term (next 6 – 12 months), my view hinges on the fact that a “Leave” vote does not mean that Britain leaves overnight. A “Leave” vote actually just triggers a 2-year exit process, where the UK would almost surely retain market access while renegotiating the terms of trade, tariffs and labor movement. That is not to say the EU will be keen to make a new deal with Britain, or that they’ll be friendly about the terms, but at least there will be time.
Possible Impact of a “Leave” Vote
I’ll focus analysis on the impact of a “Leave” vote, since a “Remain” vote means that essentially nothing changes.
“Leave” proponents argue that a Brexit would allow the UK to unilaterally pursue better trade deals, which could theoretically mean more favorable trade terms with countries outside the EU, like China and India. This could open up huge new markets for exports. Trade deals are not simple transactions, however, and worker’s unions could emerge as fierce domestic opponents to deals. The EU has negotiated trade deals for the UK for the better part of 20 years now, so Britain would have a long way to go to re-establish relationships.
Nearly half of the UK’s exports went to the EU. Additionally, Germany, Ireland, Spain, and Poland each count the UK as one of their top three trading partners. These relationships could be compromised with the “Leave” vote.
Leaving the EU might benefit local labor markets by stemming immigration, which has been a hot button political issue given the current refugee crisis in Europe. According to the Office for National Statistics, there are 942,000 eastern Europeans, Romanians and Bulgarians working in the UK, along with 791,000 western Europeans. That’s significant. A “Leave” vote may turn this on its head.
Many global businesses have, until now, chosen the UK as their hub for connecting them to the greater EU. But, in the event of Brexit, new restrictions and duties may be thrust upon their cross-border operations with the rest of the EU, leaving multinationals with an undesirable quandary. The worst case scenario would be multinationals rethinking operations in the UK, which could stifle foreign direct investment flows—a key source of growth (not to mention losing key sources of tax revenue).
On the other hand, a vote to “Leave” could empower local corporations to regain a stronghold, which in theory would benefit local citizens more than multinationals.
Bottom Line for Investors
History suggests that when voters are faced with a huge decision questioning sovereignty, they tend to want to maintain the status quo. Looking back at the Quebec referendum in 1995 or the Scottish one in 2014, in both instances voters decided to “Remain,” and the issue passed. If I were a betting man, I’d guess the same happens here.
At the end of the day, it’s not really investors like you who should fear the Brexit; it’s the businesses in the UK and EU that are heavily reliant on the single market. The restructuring and reshuffling based on policy and trade changes could be costly and arduous, and would take time. But remember, even “Leaving” means there’ll be time.
Disclosure