“If the UK votes to leave the EU, there are indications we’ll enter a period of stagnation, not an outright recession,” O’Neill stressed. That is, unless the UK’s withdrawal ends up being an “acrimonious confrontation” instead of a “harmonious exit.”
The bleaker alternative has the potential to plunge the UK into a “prolonged period of uncertainty” and a potential recession which could carry over into the second part of the year, O’Neill postulated.
If a vote to leave the EU is followed by such a troubled transition, the duo anticipate the Bank of England will be forced to cut rates within 6-9 months, business investment and hiring will decline, the FTSE 100 will fall by 10% and there would be even more pressure on the FTSE 250.
The tone is likely to impact the subsequent negotiations with the EU. This is crucial, said Tinsley, because it will determine how badly the UK’s loss of the four freedoms of EU membership are. When it comes down to it, what is really at stake in the referendum is the freedom of movement of goods, services, capital and labour, he said.
O’Neill and Tinsley said that in the meantime, their strategy has been to convey to clients the need for diversification. “We have advised clients they need to be careful and avoid excessive exposure to sterling,” O’Neill added.
The pair’s stance on sterling and UK equities remains neutral, a position they do not intend to change despite the fact some polls are showing Leave edging out ahead of Remain. “We were underweight on UK equities in the beginning of the year and moved to neutral in the Spring,” O’Neill noted.
This decision is partially based on the fact that the polls are conflicting, and thus inconclusive, in their view. But it is also because whatever the outcome, there will be an ensuing period of uncertainty, according to O’Neill.
Dean Turner, CFA and economist for UBS, identified uncertainty and shifts in business and consumer confidence as the likely swing factors for the economy and markets in the months that follow in a recent report.
If the UK votes to remain, Turner anticipates this uncertainty will dissipate fairly quickly. Tinsley expressed a similar view, saying political uncertainty would outlast market uncertainty in a remain scenario.
