Royal London Asset Management Briefing on BREXIT
01 March 2016
In its latest Investment Clock report, Royal London Asset Management looks at the forthcoming referendum on the UK’s membership of the European Union and assesses the likely economic and market implications.
Even if the UK votes to stay in a “reformed” EU, there is likely to be some market volatility ahead of the vote, while a vote to leave would have much larger economic and market impacts, at least in the short term.
Our base case assumes that, as in the 2014 Scottish referendum, undecided voters will swing in favour of staying in the EU, when faced with key uncertainties about what the alternative would look like. If our base case is correct, then any economic and market impact is likely to be limited, indeed there could be an increase in economic activity as the uncertainty lifts. There is likely to be some pick up in volatility ahead of the referendum however, given the vagaries of opinion polls.
Short Term Economic and Market Impact of Brexit
There are a number of short term economic and market developments which are likely to result from a vote to leave the EU. Even though the status of the UK vis a vis the EU would not change the day after a vote for Brexit, a marked rise in uncertainty would be a shock to economic confidence, impacting the spending plans of households and firms. We assume GDP growth would be hit and fall below trend. As a result, the main assumptions underlying the government’s deficit reduction plans would look very unrealistic, which could impact on the UK’s credit rating, over and beyond the impact of the exit vote itself.
Long Term Economic and Market Impact of Brexit
The long term impact of Brexit on the UK economy would depend on nature of any new relationship with the EU, depending on how far the impact of the “four freedoms” was eroded, and how quickly new trading arrangements could be established with non-EU states. There is a range of possible trade models which the UK might seek to agree with the EU, from a quite restricted agreement, dubbed the “Norway option”, all the way to a completely new type of trade agreement, based on existing WTO rules.
Although not our base case, there is a significant risk that the UK will vote to leave the EU. We think this would have a significant impact on the UK economy and sterling markets, at least in the near-term.
The longer term impact on the UK economy really depends on the nature of the new post-Brexit relationship which the UK negotiates with the rest of the EU. There are a range of options here, from “not much change”/”best of both worlds”, where the UK retains its existing strong EU trading links and develops new ones, to a radically altered trading relationship with the EU, where the UK’s options are more limited.
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About Royal London:
Royal London is the largest mutual life, pensions and investment company in the UK, with Group funds under management of £84.5 billion. Group businesses provide around 9.1 million policies and employ 2,988 people. (Figures quoted are as at 31 December 2015).