Download EU Referendum – Status Quo or a Leap of Faith On June 23rd 2016

EU Referendum – Status Quo or a Leap of Faith
On June 23rd 2016 the British public will decide the UK’s future relationship with the
European Union and in doing so will determine the path the economy takes which
will impact the nation’s prosperity. For some, the decision will be an emotional one
and for others it will be an analytical choice. The following paragraphs provide an
overview of both sides of the argument together with an assessment of the impact on
financial markets.
Those campaigning to remain in the EU highlight their large pool of high profile
supporters, such as the UK Government, Bank of England, US President, IMF and
OECD, who all argue that the UK would be economically worse off leaving. Leave
campaigners, on the other hand, push their argument that leaving the EU would
allow the UK to reclaim its position as a major independent world power and
advertise the high cost of EU membership, the bureaucracy of EU institutions and
the restrictions imposed on British business, while also driving debate on sovereignty
and immigration.
Both camps have economists and business leaders arguing that the UK will be
better/worse off outside of the EU, depending on their view. However, the difficulty
faced by voters in determining which is the better option lies in the fact that the
consequences of leaving cannot be known ex-ante and therefore the decision is
between the status quo and the unknown given the terms of exit will be determined
through a two year negotiation.
While polling companies and bookmakers currently suggest we are likely to remain,
the result may well surprise. As a general rule, industry and financial markets dislike
uncertainty. Uncertainty knocks business confidence, puts off investment and
consequently prices of financial assets are impacted.
Thus far the build up to the vote has seen UK assets fall in popularity. This can be
seen with the falling value of sterling against major global currencies over the past
six months. In addition, while UK stocks may have largely recovered from the falls of
January and February, the fear of Brexit has been a drag on further gains.
Hesitancy is now also emerging in economic numbers with the Q1 GDP growth
figure slowing from trend and the April PMI survey showing manufacturing
confidence has shrunk, with Brexit uncertainty cited as a contributory factor for both.
Should the vote be to remain in the EU then we would expect the immediate reaction
of financial markets to be positive with the FTSE All Share, along with the pound,
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rising as a ‘back to normal’ scenario develops. Business confidence will return and
focus will centre on the economic conditions of the British economy.
However, should we vote to leave then we would expect the immediate reaction of
financial markets to be negative. Further falls in sterling may occur, while both
British and European stock markets will likely be negatively affected.
Predicting the medium and long term implications of a leave scenario is more difficult
and will only become clearer in the event, as reactionary policies and developments
unfold. Nonetheless, we expect that the worst case scenario for the months
following a leave vote is that recessionary forces build as all trade with Europe is
called into question, while the best case is that alternative free trade agreements are
hastily arranged.
Either way confidence is likely to be knocked by a leave vote and therefore it is
expected that should this occur the Bank of England would launch a highly
aggressive stimulus policy, such as further Quantitative Easing and/or lower interest
rates. The desired effects would be twofold: to stimulate the economy through lower
borrowing rates; and to further reduce the value of sterling, making British exports
cheaper and providing a boost to economic demand.
Such a policy would be imposed with the hope of fighting off recession forces but its
success could only be judged in time. Beyond these initial policy reactions, the
outcome of a leave vote cannot be known given the large number of moving parts.
The EU referendum is a decision between the flawed but familiar status quo and the
less certain but potentially improved existence outside of the EU. Expectations
currently suggest we will remain in the EU, but it is far from certain. Portfolio
positions in the Future Money funds are well diversified ahead of the vote, ensuring
they are not overly dependent on one result or the other. Developments will be
closely monitored and an active approach to investment adopted to appropriately
react to the implications of this highly significant vote.
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Important Information
Please note that the contents are based on the author’s opinion and are not intended
as investment advice. This information is aimed at professional advisers and should
not be relied upon by any other persons.
Any research is for information only, does not constitute financial advice or
necessarily reflect the views of the author and is subject to change.
It remains the responsibility of the financial adviser to verify the accuracy of the
information and assess whether the fund is suitable and appropriate for their
customer.
Past performance is not a reliable indicator of future performance. The value of
investments and the income derived from them can fall as well as rise and investors
may get back less than they invested.
Important information about the funds can be found in the Supplementary
Information Document and NURS-KII Document which are available on our website
or on request.
For any information about the Future Money funds please contact the authorised
corporate director, Margetts Fund Management Ltd, on 0121 236 2380,
[email protected] or at 1 Sovereign Court, Graham Street, Birmingham B1 3JR.
A copy of their Terms of Business which relates to investments into the funds can
also be obtained using these contact details.
Issued by Future Money Ltd
Future Money Limited is authorised and regulated by the Financial Conduct Authority
Future Money Ltd
148 Leadenhall Street ∙ London ∙ EC3V 4QT
020 3008 8066
www.futuremoney.co.uk
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