On June 14th, the Telegraph reported a £98bn nose-dive on the FTSE 100 in the preceding 96 hours, placing blame on investor uncertainty over Brexit (1). In the same time frame, the Telegraph references 1.4% ‘dips’ for both the German DAX and French CAC indices (1). We would be forgiven for believing this is solely due to growing Brexit apprehension. Although just 6 days earlier, on the 8th of June, This is Money references a 16 point positive jump for the FTSE 100 (2). This begs the question: is Brexit really something to fear?
The World Bank are among the dooms-daying entities, cutting it’s 2016 world growth forecast from 2.9% in January to 2.4% and demonstrating cautiously-stagnated growth in the Euro Area for the next 3 years. This is compared to 3 years of consistent growth for the rest of the world, including emerging markets (3). However according to Jasper Lawler of CMC markets, the cause of the down rating of growth forecasts is due more to another monthly dip in Chinese exports, (4, 11) the direct opposite effect than that seen in mid-April 2016 when Chinese trade jumped up 11% (4). Uncertainty in the Eurozone/Brexit therefore is of course not the only driver of the world economy and therefore the British public may not necessarily feel burdened with the fear of local and global economic collapse should they choose to leave.
“We’ll get through this. The world economy is not going to shut down because… the U.K. left the E.U.” - Matt Roddy, portfolio manager with Rockland Trust (6).
The International Monetary Fund (IMF) has a bleak outlook on world economic forecast with the European Referendum, playing only a minor role in growth downrating globally. In consideration to a Eurozone crisis, the IMF projected only a 35% probability of recession and deflation in the region (5) vs 55% in Latin America, 40% in Japan and 45% in the Rest of the World category (12) - contrary to their bleak April comments weighted firmly in favour of Cameron and Osborne’s Remain campaign (5) in the run-up to the referendum vote.
What are the experts suggesting is likely to happen in the short-term following a successful Brexit vote?
According to the Economist, financial experts on both sides of the argument are predicting a negative short-term effect of a leave vote. “Uncertainty over future trade arrangements has already reduced confidence in sterling and investment could well be discouraged” (8). Long term however, neither side has a certain plan as neither knows exactly the impact and how deeply it will be felt. When attempting to renegotiate the EU reform deal, Cameron himself in February 2016 was forced to pander to opposition on the key areas of sovereignty; migrants and welfare benefits; economic governance and competitiveness (7). One certainty therefore is that in the event of a ‘remain vote’, there will be little prospect of Britain claiming greater control over of its borders, economy and welfare system despite opting out of future moves towards an “ever closer union of the peoples on Europe” (13). Open Europe, an EU commentary website, goes further to say that should Britain leave the EU, “the UK could fairly easily strike a deal in goods but it would be far more difficult in services” (14).
Deutsche Bank, Europe’s largest trader of currencies, predicts that UK equities and stocks will rise by up to 5% in the event of a leave vote, reports the Financial Times (10). Deutsche are recommending investors sell German equities in favour of buying on the FTSE. According to the FT, Deutsche’s reasoning is as follows:
“We think European equities could rise by around 5% in a remain scenario, driven by lower uncertainty and tightening peripheral spreads. In the case of a leave vote, we see around 10% downside for European equities at first (though this could be offset by a swift policy response). We think UK equities are set to outperform Europe in this case given likely sterling weakness” (10).
A sterling weakness could encourage new buyers from abroad thus benefiting UK industry. If this prediction is correct, then, “the FTSE 100 should outperform the Stoxx 600 by around 5%” according to Deutsche Bank Head of European Equity Strategy, Sebastian Raedler (10).
A Global Counsel 2015 report (9) concludes that an exit from Europe would, at least in the short term, increase the cost of borrowing for British businesses from European entities and vice versa. Each member state of the EU would be impacted differently, however the certainty is that a Brexit will have a wider political impact if Britain proves a model of leaving the union and flourishing. Success could mean political unrest in the Eurozone. Despite a period of unrest due to significant political upheaval, there is no foregone conclusion from any expert source that in the long-term a Brexit would have a negative effect on Britain either politically or economically.
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References
- http://www.telegraph.co.uk/business/2016/06/14/ftse-100-slides-towards-6000-and-pound-falls-as-brexit-fears-dri/
- http://www.thisismoney.co.uk/money/markets/article-3630841/FTSE-LIVE-Footsie-edges-lower-weak-miners-dull-China-trade-data-Sainsbury-s-sales-fall-feared.html
- http://www.worldbank.org/en/publication/global-economic-prospects
- http://www.telegraph.co.uk/business/2016/04/13/ftse-charges-above-6300-after-chinese-exports-jump-11/
- http://www.telegraph.co.uk/business/2016/04/12/the-dire-state-of-the-global-economy-in-six-charts/
- http://www.cnbc.com/2016/06/13/short-term-fears-aside-brexit-wont-have-big-impact-on-us-market-experts.html
- http://www.bbc.co.uk/news/uk-politics-eu-referendum-35622105
- http://www.economist.com/news/britain/21696517-most-estimates-lost-income-are-small-risk-bigger-losses-large-economic
- https://www.global-counsel.co.uk/sites/default/files/special-reports/downloads/Global%20Counsel_Impact_of_Brexit.pdf
- https://next.ft.com/content/cc1c1d9c-3c10-32ad-afac-a77a1971b246
- http://www.telegraph.co.uk/business/2016/02/25/ftse-100-rebounds-but-china-stocks-plunge-6pc-ahead-of-g20-meeti/
- http://www.marketwatch.com/story/how-the-imf-sees-greater-chances-of-recession-worldwide-in-one-chart-2016-04-12
- http://www.bbc.co.uk/news/uk-politics-eu-referendum-35622105
- http://openeurope.org.uk/intelligence/britain-and-the-eu/eu-wargame/
