Project fear?
Much of the debate centres around the long-term impact of the decision, as it seems everyone is in agreement that, in the short term, disruption should be expected. Indeed, the prospect of Brexit has already had a real impact, even though the consensus expectation in the investment management community is that it is not likely to happen.
Five international asset managers gave us their odds on Brexit, varying between 25% and 35%, which corresponds with the estimations of betting agencies such as Betfair and William Hill.
While Brexiteers such as Smith expect a leave vote not to have any major negative consequences from an economic point of view in the long term, financial markets seem to make a different assessment, believing UK assets will be hit the hardest. Sterling is on its weakest run since the global financial crisis in 2009, having shed more than 13% of its value against the euro, and over 7% against the dollar, in the past five months.
The much-debated Treasury report on the economic consequences of Brexit suggests it would be severely damaging to the UK economy in the long term, with the impact on GDP ranging from -3.8% to -7.5% depending on the kind of trade agreement the UK would strike with the remaining 27 EU members.
Other studies are hardly less gloomy: Societé Générale said in a recent report that were Brexit to happen, “there could be a hit to exports averaging 2.5% pa for 10 years”.
UK-based asset manager Aviva Investors believes a Brexit vote would have an even greater effect on exports. It said: “We would expect to see a permanent reduction in exports to the EU, reducing national income by 3%, rising to as much as 10% in a worst-case scenario. Foreign-direct investment into the UK would also suffer, leading to higher unemployment and a decline in the country’s long-term growth potential,” adding that a leave vote could push the UK into recession as early as by the end of this year.
Brexit would also lead to a further slide in sterling, according to the same note: “Financial markets would undoubtedly react badly to a vote in favour of Brexit, too. We would expect an immediate and sharp fall in the pound. While the Bank of England would no doubt ease policy in response to any economic downturn, it seems unlikely this would prevent UK share prices from falling sharply.”
Others, however, have a much more sanguine view of the possible consequences of Brexit. Woodford Investment Management, having commissioned an independent study of the outcomes by consultancy Capital Economics, believes sterling weakness is likely to be the only serious issue.
“There will be short-term stress in some markets and the currency will come under pressure, but we do not think it will fundamentally affect the UK economy,” says WIM head of investment Neil Woodford.
James Hanbury, manager of the Odey Allegra Developed Markets Fund at Odey Asset Management, said at the same event that he believes, in the long term, a vote to leave will have a “de minimis” impact on the UK economy and could arguably even be beneficial. “The FTSE 100 will do quite well because most of those companies are international and the translational effects will be high [because of sterling weakness], though the FTSE 250 will get hit in the short term.”
